In the fall of 1979, Van Carlisle, president of Fire King International Inc. in New Albany, Ind., dispatched his assistant export manager to Managua, Nicaraguhe -- then, as now, one of the world's more politically troubled spots. The man's mission? Collect the $12,000 the deposed government of Anastasio Somoza-Debayle owed the company for 12 fire-resistant filing cabinets it had ordered the previous year. The new Sandinista government, it turned out, promptly paid Somoza's bill -- and also ordered 14 more filing cabinets. "Everybody," says Carlisle, "has records that need to be protected."
Wresting receivables from foreign customers is seldom so simple. In most cases, persistence and outside help are required to overcome the barriers of language and distance. "When you get into the international area, you can't just call your customer on the telephone," notes Robert J. Hoag, vice-president of finance for The Jewett Refrigerator Co. in Buffalo. "Many times you don't know the laws and customs of the country. You need someone with that extra element of expertise to get your money for you."
Jewett, an exporter of refngerators to hospitals, laboratories, and morgues, engages the American Bureau of Collections Inc. (ABC), headquartered in Buffalo, to collect its delinquent foreign accounts, which generally total 2% to 3% of its overseas sales. "Usually," Hoag explains, "it's a case where the company has gone bankrupt or is just short of bankruptcy."
Foreign accounts also turn sour when buyers flat out refuse to pay or dispute the quality or quantity of the goods shipped. Another headache for exporters, especially in the Third World, is the shortage of hard currency, which can be readily converted into dollars or gold. When it is scarce, the seller's options are to wait until the country's monetary situation improves or to negotiate another, or a reduced, form of payment.
That latter tactic was taken by ABC and its representatives in the late 1970s. It negotiated a barter agreement with the Turkish government, allowing Turkish debtors to pay U.S. exporters with Turkish currency. The collection agency converted the currency into stronger currencies, then forwarded the money (minus ABC's percentage) to the U.S. exporters.
"Some of our clients had written it off already, so it was a blessing to get 45 cents on the dollar," ABC's international sales consultant, Lewis Shapiro, says of the Turkish arrangement. "Turkey today," he adds, "is doing better in the international marketplace, but it still [doesn't have] a free-flowing currency like the currencies of some of the European countries."
How big a problem are unpaid foreign accounts? The U.S. Department of Commerce doesn't keep such statistics but industry insiders estimate that, typically 1% to 3% of a company's export sales go uncollected. But for small businesses, the average may be higher. "Small companies," notes David Herer, vice-president and counsel of ABC, "take more risks, selling on terms other than a confirmed letter of credit. One reason is that they are eager to develop a new market opportunity, and, two, they aren't as well versed in the mechanics of foreign sales."
Once an account becomes delinquent, sellers have three options: They can try to collect the account themselves, they can hire an attorney who is experienced in international law, or they ean engage the services of a collection agency. The first step, the experts agree, is for sellers to attempt to recover the money themselves. "You don't want to turn it over right away, because you still have your customer relationship to think about," explains Herer.
Fire King, for one, contacts its delinquent accounts by telephone and telex. If it can't arrange for payment, it asks one of its people to pay the customer a visit during the salesperson's next sales trip. The man who collected the Nicaraguan account, for example, stopped in Managua prior to making sales calls on customers in Central and South America. "But if you have tried repeatedly to collect the account without any response," notes Herer, "you shouldn't wait any longer. The attitude of many foreign companies is that they can pull a fast one because the Americans won't put out the necessary effort or money to pursue the debtor."
The next step, if the invoice remains uncollected, is for the buyer to decide whether the account should be written off or pursued further. If it is pursued, an attorney or bill collector may be the answer, although that can be expensive, given the shortage of professionals experienced in international collections.
"Small companies are faced with the prospect of hiring fairly high-priced American counsel, who then makes contact with a foreign lawyer, who also tends to be fairly high-priced," says Tom Motley, a partner in the Boston law firm of Gaston Snow & Ely Bartlett. "By the time you get finished, the client is likely to look at that series of events and say, 'It's going to have to be $100,000 in receivables before I lift a finger to do anything.' You have to be really persistent, and, to be really persistent, there has to be a lot of dough involved."
Attorneys in larger firms with international experience generally charge $100 to $200 an hour for their services, regardless of the amount recovered, but collection agencies work on a percentage basis. A typical fee is 20% to 25% of the amount collected. "But if the claim is substantial enough," Herer of ABC notes, "say $25,000 or more. . . we'll negotiate a more favorable rate."
Collection agencies work more or less like this: They demand payment by telex, mail, or telephone. Then, if the buyer doesn't respond, a lawyer is assigned to the case. "If the attorney is able to collect the money amicably through his demands or his negotiations," Herer says, "then we pay the attorney out of the fee which we receive." But if the case goes to court, an additional amount may be charged to the client. ABC, however, won't pursue a claim in court without the client's prior consent.
ABC's average collection time is 60 to 90 days for foreign accounts, compared with 30 to 60 days for domestic accounts. Once an attorney is assigned, it can be another 30 days for domestic and 60 days for foreign cases before court action is considered. With accounts that end up the foreign courts, the collection time can be considerably longer -- from four months to five years or more. "The lag time," Herer notes, "can be unbelievable."
Even with professional help, there are no guarantees. In fact, collection experts emphasize that, with foreign receivables, the best defense is a good offense. A customer's credit should be checked prior to an order being filled. "Small companies," says Motley, the Boston attorney, "should educate themselves before they get exposed.
One good source of credit information is the U.S. Department of Commerce's International Trade Administration. Its "World Data Trade Reports" cover nearly 200,000 foreign establishments and can be obtained from district offices of ITA for $75. Other places to check on the creditworthiness of foreign companies and governments are export management companies and the international departments of commercial banks. Also, Dun & Bradstreet International publishes Principal International Businesses, a book with information on about 50,000 foreign enterprises in 133 countries.
"The basic rule of thumb in international circles," Motley notes, "is that you sell with a letter of credit or in some other way to make darn sure that before the goods change hands, your payment is assured." Besides letters of credit, other forms of payment considered to have little or no risk are: cash in advance, sight drafts (the shipper retains title to the goods until payment is received), and date drafts (payment is guaranteed by a specific date).
"Credit management," as Hoag of Jewett Refrigerator notes, "is just a question of weighing the risks. How much of a risk do you want to take? We have a saying that a sale is a gift until it is collected. We hate to look at it that way, but it's the truth. That's why we don't take many chances."
INTERNATIONAL METHODS OF PAYMENT
Method Risk advantage
Cash in advance Low Low risk; no credit extension required
Delivery order Low Simplified procedure and
more rapid payment
Sight draft Mod./Low Retains control and title . . . and
ensures payment before goods are
Letters of credit (LOC) Banks accept responsibility to pay; payment
Revocable Mod./High upon presentation of papers; cost go to
Irrevocable Mod. buyer
Data draft Mod. Similar to a time draft but ensures firm
payment date, regardless of when
customer receives goods; if date is
exceeded, title is retained
Consignment sales Mod. Facilitates delivery; lower customer
Time draft Mod./High Lowers customer resistance by allowing ex-
tended payments after receipt of goods
Open account High Simplified procedure; no customer resistance
Cash in advance Could limit sales potential; disturb some
Delivery order Dependent on credit and good faith of third
Sight draft If customer does not or cannot
accept goods; they remain
at port of entry and no pay-
ment is due
Letters of credit (LOC) If revocable, terms could change during
Revocable contract work
Data draft Same as time draft; also, complications can
arise to what to do with goods after the
date is exceeded
Consignment sales Capital tied up until sale; must establish dis-
tributor's creditworthiness; need political risk
insurance in some countries
Time draft Same as sight draft, plus goods are delivered
before payment is due or received
Open account High risk; seller must finance production
Source: Exportise, The Small Business Foundation of America Inc., Boston