Extra Credit Newsletter - Collecting Foreign Trade Debt

ExtraCredit
Business news for the finance professional

The following newsletter contains information to benefit credit and risk management professionals, and is being sent to you as a client or contact of Trade Risk Group, a leading specialty broker for credit insurance. For comments, to unsubscribe, or to find out more about credit insurance, please contact gene.ferraiolo@traderiskgroup.com

Collecting foreign trade debt
Collecting past due business debt is always challenging, but trying to collect business debt in a foreign country can give new meaning to the word "challenging".

Let's begin with the concept that, initially, you do not have to fully understand the innermost workings of every single country in the world. You can begin by understanding the similarities of countries that share certain characteristics, such as geographical area, common language or something else that groups them together. For example, the Scandinavian countries have many similarities in business practices, laws, cultural customs and history. The same grouping can be done for Latin American countries, English speaking countries, Mediterranean countries, and so on. Of course, once you are confronted with a debt collection "opportunity" in a specific country, you need to know exactly how to collect a debt in that country and how to get your money out of that country.

Another important point to recognize is that you should stop trying to equate the way business is done in the US with country "X". Your debtor is in a different country with different business practices and laws.

Following are the "Four C's of international debt collection:

Country
Understand the debtor's country from both the financial and business practices view and understand its culture. For example, in some Latin American countries, if you are selling on open account without any documentary instrument, you first have to go to court to prove that a debt exists and then go back to court to "resue" to collect the debt.

In some countries, title and credentials are very important and if you want the debtor to even think about answering your correspondence, it must go out under the signature of a senior member of your management. Also, in some countries women are not taken seriously, and a collection approach by a woman may very well be ignored.

There are many sources of information available to help you become knowledgeable about the debtor's country and keep you abreast about changes within that country, including FCIB, US Department of Commerce and Department of State, major international banks, the foreign country's embassy in the US and international newspapers such as the Financial Times.

Creativity
How creative you can be, to a great extent, will depend on the value of the debt, how much time you have and how much money you can spend on being creative. The opportunities for creativity are divided into two areas: before you ship the merchandise and after you ship the merchandise.

Before you ship the merchandise, try to investigate the creditworthiness of your customer, starting with a credit report. One of the things you want to look for is whether or not the debtor has or seems to have assets and/or related companies outside of their country. This can be significant if the debtor is located in a Second or Third World country.

Try to get credit references if the references are located in the US, Canada, or Western Europe. You want to find out how the debtor pays their bills, and where the money comes from. Now is also the time to consider, if possible, a guarantee - especially if the guarantor is located in a country considered to be "user-friendly".

Rather than ship on open account, see if you can use a time draft. In many countries, a defaulted instrument such as a time draft is more significant than a defaulted open account when you are trying to collect the debt.

After you ship the merchandise, the door is wide open for utilizing creativity to collect your debt. While creativity is encouraged, it is also suggested that you only operate within a legal framework.

Connections
We cannot overestimate the importance of developing contacts for debt collection purposes in other countries. If you are unable to spend the time necessary to do this on your own, the US Department of Commerce or a foreign Chamber of Commerce can be helpful in pointing you in the direction of someone in that country to assist you.

However, you need to be careful when using a third party in the debtor's country to help with your foreign debt collection. References should be checked out and payment of non-contingency collection and suit fees should be avoided if possible.

Confusing
This word more or less summarizes foreign debt collections. Yes the debtor may very well take his fax machine home with him every night. Yes, almost everyone in the debtor's country goes on holiday during the month of August and the courts have been known to close for months at a time - and so on.

A confused state of mind may be the place to end. Good luck with your foreign debt collections.