Thursday, December 22, 2005

The International Obstacle Course

The International Obstacle Course

By William Atkinson

Clearing the hurdles of credit and collections overseas requires training, excellent teamwork, and frequently a third-party’s helping hand.

International business represents a substantial portion of total business for a lot of companies. That can be a benefit or a drawback. On the one hand, business from varied markets can be good for a company’s growth. On the other hand, it can create an exposure to more risk than domestic credit and collections.

One significant challenge is managing country risk – changes in a nation’s economy or government, currency issues, and so on. “It is difficult to stay on top of all this,” explains Paul Beretz, founder and managing director of Pacific Business Solutions and a partner with Q2C, Clayton, Calif. “For example, you may have a customer who pays like clockwork every 30 days, but if something changes in his country, that can jeopardize those payments.”

Knowing the ins and outs of international credit and collections can significantly reduce risks. A couple of years ago, for example, Corning Cable Systems in Hickory, N.C., conducted quite a bit of business in South America, using a number of irrevocable letters of credit. While this is a common practice for many companies, Corning gained an edge in payment by using a discounting strategy.

“Even though we were granting extended terms because of the construction times on the projects, the availability of simple documentation and the discounting of the letters of credit allowed us to receive our funds well in advance of the due dates,” explains Thomas Brady, credit manager. The key was utilizing a network of banks throughout the U.S. that the company had established and focusing on those that would discount the letters of credit at favorable rates.

Another challenge with international credit and collections is that very little “generic” knowledge applies to all countries. Each area of the world is unique in many ways, so once the few “basics” have been mastered, gaining expertise in each country, region, or continent is the next step. Following are challenges for international trade in some key areas of the world.

China

According to Jason Probst, director, international business development for D&B Receivable Management Services, Bethlehem, Pa., until very recently the concept of credit history didn’t exist in China. “Most loans were given out based on favoritism or for other reasons, without any credit history, documentation, or financial due diligence,” he explains.

Banks are trying to establish histories to bring some order to the situation. Meanwhile, over the past three years the government has been selling millions of dollars of non-performing loans, or NPLs. Foreign investment firms, including many from the U.S., have been purchasing the portfolios at a discount. “One of these firms uses us to do their NPL collections,” Probst notes.

Corning’s Brady is also aware of the challenges that dealing with China presents. “More and more Chinese companies are requesting credit terms,” he points out. “The problem is often not having adequate information on which to base the credit decisions.”

Brady has found it difficult to get financial statements and other standard information from customers in China, information readily available from customers in the United States. “There really is no credit history available for most of these companies,” he continues.

Even if a firm feels comfortable with these companies and begins doing business with them, they can still run into payment problems. Brady cites a couple of examples: If a firm offers 30-day terms and provides next-day air shipment, the customer may pay in 60 to 90 days. If the firm offers 60-day terms and provides ocean carrier shipments, that customer may pay in 90 days. One reason, he says, is that the Chinese bureaucracy tends to add 30 or more days to the process for importation of goods, customs clearance, foreign exchange approvals, and so on.

To address these concerns, Corning may place Chinese customers on cash terms for small-dollar sales or letters of credit for large-dollar sales. Brady has found that most will accept these terms, because they want to do business with the company. “Even some large accounts – in excess of $100,000,” he says, “will come up with the cash.”

Europe

According to D&B’s Probst, many U.S. companies that begin selling to European companies are shocked when they try to start collecting. “One reason is that the procedures are different from country to country,” he explains. For example, while a dunning letter may be effective in the Nordic countries, it will be discarded in most of the southern countries. In Germany, letters are effective, but phone calls are not. In Italy, neither letters nor phone calls are effective. “In Italy,” he explains, “you need to show up face to face.”

In the late 1990s, European countries began to realize that late payments were a serious problem for the economy – costing numerous jobs and millions of dollars in interest and export loss. The European Commission attempted to implement late payment legislation to set out a clear path for companies to get paid on time. “It’s now four years later, and the legislation hasn’t done much,” says Probst. The reason: It hasn’t been accepted at the commercial level in the countries.

“In fact,” he adds, “payment delays continue to get worse.” In addition, the legal enforcement infrastructure designed to help companies collect actually impedes the collections process in most countries. (The Nordic countries are an exception.) “The European Commission,” he reports “is reviewing the legislation this year with an eye toward streamlining it to make it easier for companies to get paid.”

Mexico

Until recently, electronic invoicing (wire transfers) was not legal in Mexico. Even though it now is, it hasn’t made a lot of difference yet, according to Probst. The most common form of invoicing continues to be manual, face-to-face invoice presentation, most of which still requires original documentation. “Payment is even handled at specific hours,” he continues. “[Creditors] need to pick up checks between 3 p.m. and 5 p.m. on Fridays, or they won’t get paid.” Some large companies are becoming involved in electronic transfers but, according to Probst, it will be years before that becomes the most common form of transaction.

Canada

While other countries can be a problem, doing business with Canadian customers should be a cakewalk, right? Not really. “Most people don’t realize it, but there are some distinct differences between doing business in Canada and doing business in the U.S.,” Probst points out. There’s a significant difference between doing business in French-speaking Quebec, which has one code of law, and the rest of Canada, which is based on British common law. “For example,” he says, “when doing business with companies in Quebec, you must speak in French and document your invoices and contracts in French – unless you have written documentation from your customer that it’s OK to do so in English.”

And trying to collect from companies in the far-flung areas of Canada is no simple task. “Many of the courts,” he notes, “are very remote.”

International Strategies

To navigate through the confusing maze of international credit and collections issues, experts recommend three general strategies: education, internal teamwork and vigilance, and third-party assistance.

Education: “While there are some good education programs on international credit and collections, such as seminars about what’s going on in different parts of the world, widespread education is still lacking,” admits Pacific Business Solution’s Beretz. “In addition, it is difficult for credit people to get together and talk about international trends.”

One program Beretz recommends, both for the education offered and the opportunity to network, is a three-month online certificate offered by FCIB and Michigan State. (See “Cohort Training in Cyberspace” in the August 2004 issue of CCR.) “To date,” he reports, “over 300 people from around the world have taken it.”

D&B Receivable Management Services’ website (www.dbrms.com) offers a lot of information about the international credit and collections scene. In addition, D&B offers a free half-day international collections seminar. For information, contact Jason Probst at: probstj@dnb.com.

Internal Teamwork and Vigilance: “You need to be 100% accurate when dealing with other countries,” emphasizes Corning’s Brady. “Customers will take any opening to delay or withhold payment, and it’s difficult to resolve these when you’re 5,000 miles away and dealing with 12-hour differences in time zones.” He recommends having a good customer service department that doesn’t make mistakes.

He also recommends staying on top of information, especially country risk. One way to do this is to have a good sales force in place in each country where you do business. “They can help you get ahead of any problems before they develop,” he explains.

Pay attention to documentation. “One major difference between international and domestic credit is that the former requires significantly more amounts of documentation,” explains D&B’s Probst. “There are a variety of terms of sale, only one of which is the letter of credit.” In addition, there are more opportunities these days to transmit documents electronically, which can reduce inaccuracies and time delays.

Third-Party Assistance: It’s no shame to lack comprehensive international expertise on staff. In fact, most companies find it to their advantage to utilize a variety of third-party providers who specialize in various aspects of international credit and collections.

“Letters of credit have so many intricacies that it is easy to end up with discrepancies,” notes Beretz. “Few companies want to hire a specialist on staff to handle this responsibility. One alternative is to use third-party providers that specialize in handling letters of credit.”

Some large banks are also excellent sources of assistance. “A lot more banks these days, especially the big ‘money center’ banks, are getting into the business of managing international credit and collections activities for companies as part of their receivables management services,” states Jerry Topitzer, vice president-head of structured trade finance, for JPMorgan, New York. Such services include the creation of export documents as well as taking the receivables created from those documents and providing discounted financing.

Another relatively new service area in the international arena is the credit derivative, often called a credit default swap or CDS. “These can be used in hedging situations for large concentrations of risk in receivables portfolios,” explains Topitzer. For example, if a firm is doing business with a government in an emerging market and can get a ministry of finance guarantee on obligations arising out of the contracts, it can consider buying CDS contracts on that particular sovereign borrower. “In so doing, though,” Topitzer warns, “you need to make sure that you completely understand what the CDS contracts really cover.”

In sum, international credit and collections is a quagmire of confusion and challenges for most credit professionals. Still, because of the potential for increased business that international sales represent, credit professionals cannot afford to ignore it.

Still there’s no need to go it alone. Look for educational opportunities to learn as much as possible. Then, don’t be afraid to rely on third-party specialists to help hurdle the obstacles.

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Helping Hands

Every now and then we all need a little help from our friends. Here are some resources to help get over those international hurdles.

FCIB (Finance, Credit and International Business)

An association of executives in finance, credit, and international business. For information on FCIB and its on-line international credit management program with Michigan State University, visit the association’s website: www.fcibglobal.com.

D&B Receivable Management Services

For information on D&B’s international credit and collections seminars, contact:

Jason Probst, Director, International Business Development, via phone: 484-242-7494 or e-mail: probstj@dnb.com

Coface

An international credit services company that provides credit insurance, debt recovery, credit risk information, receivables management, factoring, and receivables securitization. For information on Coface’s Country Risk Conference and its Country Risk Guide, containing macroeconomic and sector information on more than 140 countries, visit the Events section on www.coface.com. For information on Coface’s Country Ratings, visit www.cofacerating.com.

International Association of Commercial Collectors

For help in locating members that are based in and/or provide collections services in foreign countries, check out IACC’s online directory, which you can search by country, at www.commercialcollector.com.

© Copyright 2005 The Thomson Corp. and Collections & Credit Risk. All rights reserved.

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