International trade with foreign customers pose many challenges to businesses who are looking cross border, at new markets, to acquire customers. None more prevalent, but mostly ignored when setting up trade agreements and process than, the credit process.
The deal is signed but how do you ensure you get paid? Sales documentation is an integral part of any sale whether international or domestic. Initial contracts should detail your credit terms and process so the client is clear when and where to pay. The process element lays out what will be supplied by you and what is required by them; in its rawest form a contract backed up by a purchase order followed by a proof of delivery / signoff and finally an invoice. The value of this documentation, although extremely important to each stage, should never be seen!
Do you know the customer? Some due diligence on the buyer / customer should always be obtained but even more so on cross border transactions. Some brief questions to ask are as follows;
- Is the company credit worthy?
- Who is the main order contact?
- Who is the purchase ledger contact and who will authorise the payments?
- What will the debtor require to pay you in the host country?
- Are there any additional cultural or regulation barriers you will need to adhere to?
- What could delay payments, again, cultural or regulation?
- Can you speak the language? Could language be a big barrier to collection?
The language barrier. The most common form of payment default and collection issues for cross border credit control and credit collection is a lack of communication and language skills. Just because the order was placed in your native language doesn’t mean they can or want to understand you when you are passed over to purchase ledger. With larger blue chip businesses orders will be made in one country but payments are made in another thus enforcing the need to understand and pre prepare for any language barrier. In these cases multilingual credit controllers are a must when operating a cross border collection strategy.
Cultural differences, the ease of doing business. Identifying cultural differences save you from;
- Offending the customer
- Wasting time
- Understanding when you will get paid
The best examples for this are in certain countries no payments are made due to more senior staff taking one to two months off or total / partial shutdown, for example Spain & Italy where this is most common. Understanding a countries or companies religious views will help you understand specific cultural holidays. Countries like Switzerland are generally offended if they are chased for money, even if overdue! Do your homework and read as much into a countries payment trends as possible and understand a countries and market segments average payments days as best you can. A good example of extremities are Germany who are generally good payers with an average DSO of 45 days and the UAE with an average DSO of 100 days. These figures were supplied by the world bank survey.
If all else fails how do we get paid? Companies never plan for debt to go beyond terms so when they find themselves in a recovery situation peace of mind should be taken from following the correct engagement process and paperwork, of course this does not guarantee payment. Engagement with debt recovery specialists and lawyers will help you understand the next steps to recovery. Understanding the collection rates in the specific country and the local late payment act directive is very important in working out if it is worth pursuing the debt in the first place. Using lawyers with international reach / partners will help when suing under domestic law but transferring to a local court in the clients country for recovery.
Credit controllers and credit managers are extremely important to cross border credit collections. Having access to a credit controller that can speak the local language to the client can be the difference between getting paid on time or not at all. If you are a small business with the potential to expand into overseas markets it is worth outsourcing this vital element of credit control to protect your business whilst still being cost effective for the business. The benefits of effective credit control in cross border credit collection are as follows;
- Communication with your debtor in their language
- Find out any smaller issues earlier in the invoicing process rather than waiting till the end of the credit process
- If there are any issues stopping the debtor from paying outstanding invoices, credit control will act as an intermediary to resolve the issues
- Cement a relationship with the accounts payable team to ensure you get paid on time so you can cash flow forecast
- Weed out the can’t pay from the won’t pay.
Effective cross border credit collection requires solid contracts and paperwork, language skills, host country knowledge and plan recovery process in advance with strategic partners.
This article was published in the November 2017 CCR Magazine on page 16. Please click here to view.
Gareth Fawke – Director
Inksmoor Finance Group Limited