If you're not careful, that's how long it could take you to collect international receivables
Congratulations! your company's plan for global diversification is a wild success, with sales orders rolling in from absolutely everywhere. Or should we offer our condolences? Now you've got to figure out how to collect all those international accounts receivable.
Unfortunately, the realities of foreign collections can be downright shocking. "Take a country like Malaysia," says Stephen Chipman, the director of international services for accounting firm Grant Thornton's southwestern U.S. division, based in Dallas. "If you say COD, Malaysian companies interpret that as meaning payment is due in 30 days. Then you're lucky if they get around to paying you within 90 days."
Les Kirschbaum, president of Mid-Continent Agencies, an international collection company in Rolling Meadows, Ill., agrees about the difficulties of collecting foreign receivables. "U.S. companies make a big mistake when they assume that they can deal with problem foreign accounts the same way they do here, just by hiring an attorney or a collection agency. No way," says Kirschbaum. "In countries like Mexico, for example, the legal process involved with chasing after a problem payer is very, very complicated."
Because problems with foreign receivables are easier to avoid in advance than to clear up afterward, here's a guide to help both novice and full-fledged exporters navigate their way around foreign collection hazards.
Stage One: "We're negotiating an overseas sale. What should I do before signing on the dotted line?"
Before figuring out how to price your sale and design its terms, you need to learn as much as you can about the country's payment norms, creditor protection laws (if any), and your customer's credit history. To quantify the risks, start by checking with your regional branch of the Export-Import Bank, as well as the U.S. Chamber of Commerce.
"Even if you've sold goods or services to a foreign company in the past, it makes sense to check up regularly on changes in its country's economic or political risks," says Kirschbaum. "We always warn companies that if they extend credit, they're extending it to a country as well as a company."
Then check out your potential customer as carefully as you would a new domestic client. Good sources of information are your accounting firm (if it has international offices or connections to an international network), your international bank, and most credit-reporting services.
Tip for novices: Until you learn to finesse the complexities of foreign markets, take a conservative stance. At the very least, that means walking away from any sale that would have scared you off on the domestic scene.
Stage Two: "After doing some research, I still want to make the sale. What terms make the best sense?"
Start by insisting on payment up front. If your customer agrees, life as an exporter will be a whole lot simpler. "We're pretty blunt about telling new customers that until we get to know them better, we insist on payment in advance--for which we give them a 2% price discount--or payment through a confirmed, irrevocable letter of credit," says John Kirchgeorg, the owner of Life Corp., a manufacturer of emergency oxygen units in Milwaukee. "We won't loosen terms until a client has proved that it's worthy of our trust. Otherwise, it's too risky."
What if a foreign customer goes for the letter-of-credit option? Don't automatically accept, advises Grant Thornton's Chipman. "You've got to check out the creditworthiness of your customer's bank to make certain it will be willing and able to release payment as the customer receives your goods or services." The best way to check out a foreign bank is with the assistance of your own local bank. If it can't help, try the U.S. Chamber of Commerce.
Tip for novices: If you're afraid of losing business because your terms are too strict, consider insuring your foreign receivables. (It will cost you, but not as much as a deadbeat customer will.) The Export-Import Bank offers a variety of insurance packages, including some aimed at small businesses and short-term buyers of single policies.
Stage Three: "We've agreed on the payment terms. Now my worries are behind me, right?"
Sad to say, exporters need to protect themselves against currency risks as well as credit risks--even when their customers are in countries that seem safe. "I remember back in 1992 when the British and French currencies took a nosedive. A lot of exporters were shocked to learn that they could lose 25% of the value of their receivables overnight," recalls Chipman. "Don't delude yourself into thinking you're at risk only in a volatile Eastern European or third-world country."
When you're dealing with large accounts or extending sales terms over an indefinite period, consider a strategy relied on by most large corporations: currency hedging, which allows companies that expect to receive their payments in foreign currency to lock in a predictable conversion rate. But the downside is that buying the hedge can be pricey. Another alternative: set up a foreign bank account closer to your customers, which can result in quicker collections and minimize currency risks.
Tip for novices: Keep things simple (and inexpensive) by insisting on payment in U.S. dollars. If your potential customer won't agree, move on.
Jill Andresky Fraser is Inc.' s finance editor.
There's no doubt that foreign accounts receivable can create hassles. Here are some good ways to minimize them:
- Perform credit checks on potential new customers. Two good sources: Dun & Bradstreet (subscribers only may call 800-932-0025 to order international reports) and Mid-Continent Agencies (3701 W. Algonquin Rd., Suite 800, Rolling Meadows, IL 60008; 847-797-1600; www.mca4cash.com).
- For a range of insurance products covering foreign receivables and international working-capital expenses, contact the Export-Import Bank of the United States at 811 Vermont Ave. NW, Washington, DC 20571; 800-565-EXIM; or try any of its five regional branches.
- If you're considering currency hedging, you can contact most large banks or try to curb costs by relying on a discount foreign-exchange provider. One lead: Sonnet Financial, 1670 S. Amphlett Blvd., Suite 110, San Mateo, CA 94402; 800-272-8339.
STEPHEN CHIPMAN, Grant Thornton LLP, 1445 Ross Ave., Suite 3500, Dallas, TX 75202; 214-855-7300; email@example.com 107
LIFE CORP., John Kirchgeorg, 1776 N. Water St., P.O. Box 3000, Milwaukee, WI 53201-3000; 800-700-0202 107
MID-CONTINENT AGENCIES, Les Kirschbaum, 3701 W. Algonquin Rd., Suite 800, Rolling Meadows, IL 60008; 800-374-2000 107