Collecting bad debt is often underestimated in international transactions. Buyers and sellers view payment from their own perspective and this may sometimes determine conflicts. Order disputes, wrong invoicing, legal requirements and more may lead to payment delays and uncollectible accounts.
As an exporter you cannot ignore the fact that planning ahead reduces these risks and prevents losses. There are reasons for this and we examine them to remind you of their importance.
1. Your Business Cash Flow Is Everything
Without a healthy business cash flow no business can survive for long. Having customers paying on time is one of the most difficult tasks every business selling on credit faces on a daily basis. Any payment delays can disrupt not only the ordinary running of your business. It can bring the whole company to a halt and to much worse conclusions.
Also, for banks and working capital lenders good business cash flow is an indicator that you are a good borrower. For example you are able to do accurate receivables forecasting of your customers payment on different periods, e.g. monthly, quarterly or yearly. As a consequence, you estimate of collecting payments based on your payment terms.
But not all invoices will be paid on time and in full. A percentage will come too late or never. Some could even be partly paid with the customer promising to settle the balance at an ever later date. This will certainly affect negatively your cash flow and making difficult to pay suppliers and plan for future purchases and investments.
The question is how to handle these situations. You must have a plan for delayed payments and for collecting bad debt. Any outstanding payments will increase the probability of making a loss. This means that promises of payment will never be fulfilled.
Collecting bad debt is different than collecting money within your payment terms. A delay of 10 days may be accepted to some extent. Not one of 120 days. Your late paying customer is avoiding you for some reasons. Then you must have a procedure to keep the account under your control and pursue with all means the recovery of your money.
2. Even Your Best Customer Might Fail To Pay You
Not all customers are the same. Some run their business in difficult countries with high currency volatility but are good payers. Others send you big orders but are always late paying. The variables are many. So if you run a small export business, it can be difficult to keep track of all these factors because you also have to focus on other things.
Then, you should consider the eventuality that even your best customer will fail to pay you on time. Even worse, disappear from your radar. Preventing such situations is difficult. It’s even more difficult and embarrassing to contact their accounts payable and tell them to pay you.
But you must ensure that this customer is still a good customer. Any worsening in their ability to pay can be an indicator of bad things to come. Maybe they have over invested in an acquisition or plant. Or they are experiencing a contraction of their market share.
Whatever the reason, you have to ensure you know what’s going on. Knowing your customer in advance is one of the best things you can do for your business. You know them in person, keep communication active. But bad things always happen when we don’t expect them to.
If your customer is not responding to your emails and phone calls anymore, your receivables are turning into uncollectible accounts. Therefore, set a procedure to immediately outsource them to a professional service whose job is collecting bad debt. Then, you not only may prevent making a loss but also lose a customer. Whatever its business size is.
3. You Don’t Have Skills For Collecting Bad Debt
Even large companies have problems collecting outstanding receivables. Some have international credit departments with staff able to monitor accounts and contact customers on a daily basis. On the other end, small exporters in most cases face difficulties of various nature that prevent active collections. Two main reasons are time and skills.
A strong demand for your products does not exclude that you are exempt from facing late payments. A foreign customer is more likely to contest a bad quality supply on trivial reasons. In this case, you may be forced to accept a reduction on the invoice amount to save the sale. In some cases, the customer may request to pay at the next order.
Even if you know how to solve these issues, it doesn’t mean you have the right skills to deal with a bad paying customer. If an outstanding invoice is overdue for more than 90 days, it’s better to know in advance what to do. Again, a professional collection service knows how to deal with it. This should be part of your plan for collecting bad debt.
In these situations, a debt collection agency is an ideal partner because collectors do this on a daily basis and know how to treat late paying customers. Not only receiving payments is faster, you also don’t have to chase them down.
As a small business you likely have no time or resources to dedicate time for such activities. One another important reason is that debt collectors keep records of collecting bad debt attempts. In case of legal action this comes as the perfect proof for the court that you tried all you could to contact the debtor and recover the debt.
We want you to know how our service works. Please read our Terms and Conditions first.
When selling on credit late payments are a business fact. What you should have is a payment monitoring process reminding your customers that your invoice is due in a few days. For example, for a Net 60 invoice setup email reminders to send 30, 15, 7, 3 days before and one on due date. This will ensure you get on top your customer’s mind when it comes to paying suppliers.
When payments are late, get on the phone and start calling your debtors knowing what you want to achieve. Remember the sole purpose for calling is to understand the customer situation and receive a commitment to payment. During the phone contact, take notes about everything you both say to support any future third-party collection action.
Some will give you excuses about bad quality of products or of mistakes on the invoice. Others will try to postpone payment saying that they are going to receive some cheques soon. At Recoupera we often hear that they are waiting for their accountant to come back from holidays!
However, all these promises and excuses may not materialise in hard cash. Some are genuine. But in many cases it’s a tactic to delay payments. In fact, in some instances expect them to ask you for a discount.
But promises of payment don’t pay your bills to suppliers. Make sure they promise you by committing to a set date and in writing. This way, if you ever call them again, you have the proof.
If you have a creditworthy customer who always pays late but never fails, try to use factoring. This way you receive cash in a matter of days and increase your cash flow. A factoring company may still accept outstanding receivables but not beyond the 90 days.
5. More You Wait, Less You Recover
You most likely deal with customers you have known for years and have done good business with you. Even so, your best customer can become your worst nightmare. If your business relies on a restricted number of buyers, you may find yourself in troubles if one doesn’t pay you on time. You could face insolvency and bankruptcy.
The CLLA has produced revealing information about your probabilities to collect your money over time. From the graphics below, if you wait for 6 months for your customer’s promises to materialise, your probabilities to collect money are 57%. A 28% drop from 3 months outstanding.
So, unless you have a written guarantee, credit insurance, collateralised assets to cover the potential loss, you really run the risk to see your money disappear.
Note that the collectibility rate refers to the likelihood to be able to collect. That’s different from how much from the claim you recover. So if your unpaid invoice is $30,000 and it’s 6 months overdue, even if you win against the odds and collect, you may not get the full amount.
Below are some reasons to expect for quick collection action:
- Your customer has serious cash flow issues and can’t pay you more than a fraction of what you claim.
- The business is in insolvency and you are down the list of creditors because secured customers come first.
- Your customer is being sued by another company and is incurring in financial troubles.
- The business failed and the ownership shut it down. In this case, you won’t recover anything.
- You wasted too much time waiting for payment and your customer’s government has restricted access to foreign currency. Then, even if they want to pay, they can’t.
People working in small companies often have different roles and manage various tasks at once. Some are good at something and learn to deal with unfamiliar business areas. But if practicing makes you perfect, it takes time. You cannot become a sales person over a matter of 4 weeks or learn all technicalities about exporting.
Maybe you are the founder and have some technical knowledge but know nothing about accounting. On the other hand, a business partner is good at marketing but when it comes to deal with sales is totally clueless.
It’s for this reason that collecting outstanding accounts is not a job you can perform as if you were an expert. You can learn but it’ll take time and effort to reach acceptable levels. But you have to run a business. You cannot micromanage and have your feet in all shoes.
You must delegate. One main reason is that you could easily reach total exhaustion before you realise. This is one of the findings the Brother’s Small Business Survey reported in 2015.
Think about it. Unless you are an experienced collector, give this task to a professional who has experience and knowledge on collecting bad debt. One who does this as a profession, not as a one-in-a-million task.
7. You Are One Of Many Creditors Waiting For Payment
Your customers may come from different parts of the world. But ethics and trustworthiness are universal principles that all should possess. They are fundamental in the relationship you want to build with them. They should have the character of paying their obligations. So you must investigate about it.
One of the major credit decisions is that of determining customers payment behaviour and whether they incurred into bankruptcies or litigation.
There are two types of creditors. Secured and unsecured.
Secured are those who have secured their credit using a collateral, such as a tangible asset. In case of payment failure, the asset will be retained.
Unsecured are the majority and have no cover against the risk of non payment. If you cannot recover the money from goods or services you sold, you made a loss.
Some forms of security are bank guarantees or pledging assets although they are difficult to obtain in international transactions. But if you don’t estimate such events, you are running the risk of damaging your cash flow and business overall. It all depends on how well you know your customer.
By updating your customer files regularly, you should be able to detect any worsening in your customers’ finances. Therefore the next purchase order you receive you know it’s time to re-assess their credit limit and maybe change payment terms.
Your objective is not to be in the list of unsecured creditors. Usually unaware of an impending insolvency case. Further, your customer might not immediately disclose this problem and any promises you receive delay your payment.
Therefore, have a monitoring process of your customers’ finances. You can avoid losing your money and report the debt straight to a debt collector immediately. If your money is not collateralised, you are likely to lose it.
We want you to know how our service works. Please read our Terms and Conditions first.
Law courts around the world differ and offer a diverse level of protection, enforcement and efficacy. However, when taking legal action against a foreign debtor one of the few common elements is that you need documents to support your claim.
Further, you are better off if in your sales contract you clarify which national law applies to the contract and its jurisdiction. Also, ensure you have an arbitration clause.
In general, you must prevent any legal problems by knowing your customer situation from the start. It’s not enough to check credit rating and the need of licenses. You might face issues with import restrictions, currency policies and country risk, to name a few.
Further, a sales contract with ambiguous or poorly defined clauses and terms may lead to troubles. Your customer may put payments on hold, dispute your service and contest the contract validity. As a good practice, be sure of what you need to do in order to find yourself in a better position in case of legal action.
a) In your commercial invoice itemise, list and specify:
- Your company details
- Buyer company details
- Order number, invoice number and date
- Purchase order number
- Your reference
- Number of pallets, packs, net and gross weight/volume
- Incoterms e.g. FOB, CIF, etc.
- Container and seal number, vessel name
- Product name
- Product description
- HS Codes (if and when needed)
- Unit prices
- Total prices
- Total invoice
- VAT, taxes
- Conditions and method of payment
- Your bank details
b) Whenever possible, applicable and required keep originals, make copies and obtain signatures of:
- purchase order
- proforma and commercial invoice
- credit application
- sales contract
- export licenses
- any mandatory license and permit, e.g. phytosanitary, CITES, etc.
- certificate of origin
- export declaration
- government issued permits and certificates
- customs invoice/receipt
- collection/delivery receipts
- freight/air waybill
- bank statements
- statement of account
9. Collecting Bad Debt From Foreign Customers Is More Difficult
We now know that trading with international customers needs your special attention. It involves legal issues that don’t apply to your own country.
- laws are different and what works in your country might not work in that of your buyers.
- your time zones are different and in some cases unworkable
- you may not speak the same language. Even if you use English as lingua franca you both may misinterpret communications
In general, your sales contract should detail any possible situations in case of unpaid goods and services you sold to your buyer.
What are you going to do if a customer in an overseas country refuses to answer your calls and reply to your emails?
If your credit collection is unable to collect and settle bills, your options are:
- forget about the account and write it off to bad debt as a loss
- keep chasing the customer for weeks and months
- hire a debt collection agency
- hire a law firm
In the last two cases, you need to provide all documents to support your right to receive your money.
But remember that it still depends on what rights you can claim in the debtor’s country. If in your sales contract you didn’t specify which law applies and in which court you intend to litigate the case, you may have difficulties.
Another example is if you file a lawsuit in your country against your foreign debtor and obtain a judgment. If the two countries have not signed a reciprocal treaty, you cannot enforce it.
Therefore, seeking legal advice in your buyer’s country ensures you will be in a strong position to claim your rights if and when you want to recover a foreign bad debt.
Export sales for a small to mid-sized businesses may need support through financing. Many lenders offer short-term financing in the form of trade loans if certain conditions occur. One such condition is the exporter ability to collect its receivables from buyers. But export sales on open account terms are more difficult to finance.
A financing company will make a lending decision on several factors. One involves assessing whether the exporter’s buyers represent a non-payment risk for the lender. Therefore, you need to select and assess your buyers with care to improve your chances to receive financing.
Alternatives are cross-border factoring and trade acceptances but you can only use them in and with certain countries. Also, the factor may not approve some receivables because of the buyers low credit rating. For the same reason, a bank may refuse purchasing receivables that present a high risk of non-payment.
Therefore, always make a credit decision assessing your foreign buyers risks. Overall, this process will prevent bad debts while ensuring you can finance your business for further investments and expansion.
We want you to know how our service works. Please read our Terms and Conditions first.
Recoupera connects you to top debt collectors worldwide at reduced rates. Sign up free and start collecting your outstanding receivables and bad debts now.
This article contains general legal information and material for informational purposes only which are not intended and should not be taken as legal advice. Recoupera is not a collection agency and it is not a law firm or a substitute for an attorney or law firm. All informational material provided may not reflect changes in the law. For legal advice, contact a lawyer.