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Slow and Non-Payment Still a Concern for Overseas Traders
by Robert Paisola

The globalization of many businesses is accelerating, but collecting foreign billings still can be slow, troublesome and risky, according to an international collection expert.

"With trade barriers lifted as a result of the formation of the European Community (EC), many procedures and standards have become more uniform, thereby reducing the costs and difficulties that hindered trading with these countries individually in the past," said Clay Torres, manager of international collections for Western Capital, a leading U.S.-based commercial collections firm.

However, doing business with EC countries or other foreign markets often still carries a high risk of slow or non-payment, he warned. And securing funds from customers or clients in developing or unstable countries is particularly difficult.

"The most important thing is to know the economic and political conditions in the country," Torres said. "A company should be aware of factors such as government stability, overall prosperity level, national debt, currency strength and inflation rates.

Generally, doing business with companies in prosperous, stable nations, such as those in the EC, carries less risk than with firms located in countries with more disorganized economics such as Argentina, Brazil and Peru, according to Torres.

"Also, economic activity and funds in many countries are controlled by central banks," he noted. "If there is a hold on exchange imposed by a central bank, a foreign creditor won't get paid." Torres added that as a last resort, a business can try to collect payment with an exchange in a secondary market, but the losses will be severe.

Besides gauging the economic situation in each country, Torres urges that each customer be scrutinized closely.

"Surprisingly, this is the most common reason why many accounts end up in the third-party collection cycle," he said. "We encounter case after case where there's no record of bank or trade references being checked, no credit checks or no checking through international departments of banks. It's amazing that many exporters do less checking on an international account than on a customer next door.

To minimize the risk of late or nonpayment from foreign customers, Torres offers the following tips to U.S. firms:

  • Make use of the US Department of Commerce (DOC), which provides several helpful services. At its Washington office, the DOC has "country desks" that can provide economic and business climate information on all nations. If a US firm has a problem collecting a delinquency, the DOC also can contact foreign government officials and agencies to help resolve the matter.

  • Run thorough credit checks on foreign prospects. A number of major credit agencies have international capabilities. The DOC offers names of these private organizations that provide reports on the payment habits of overseas firms.

  • Obtain a letter of credit. US businesses should insist that foreign customers obtain a letter of credit through a sound, well established international bank to cover the cost of the goods and services. This assures that a customer not only has, but has reserved and earmarked, funds for payment. Upon delivery of goods or completions of services, payment should be guaranteed by the bank. Open account terms should be extended only to established customers in extremely stable countries.

  • Also, exporters should beware that letters of credit have expiration dates. Paperwork to claim payments should be processed promptly.

  • Bill only in American dollars and insist that you are paid in American currency.

  • Be aware of the cultural idiosyncrasies of a country. For example, in Japan, businesses leaders want to establish a dialogue and a comfort level before they will negotiate or sign contracts with foreign companies.

  • Consider hiring residents of the countries as marketing representatives and trade specialists. Natives are familiar with businesses in their home countries and can provide "inside information" on cultural and business practices.

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