This week, Baker Ing’s Director, Lisa Baker, takes some time out to share her thoughts on collecting in difficult territories:
Trading in ‘difficult territories’ is a topical subject for senior credit professionals. Competitive business environments mean companies must challenge their appetite for risk by expanding into emerging markets. Preparing your Risk Strategy and Credit Policy for these new and challenging markets requires a robust process, as it often necessitates innovative ways of trading.
Baker Ing International have seen an increase in Latin American cases passed to us for debt collection and mediation. It is a common frustration for clients that, due to currency control, debtors cannot pay invoices as a result of bank restrictions. However, although this is quite possibly true in some genuine cases, very often it is merely used as a convenient excuse.
How do you resolve these issues, and how can you ensure your Credit Policy is strength tested to account for such factors?
We recommend you take the following proactive measures when trading in countries with volatile sovereign risk and restricted currency controls:
- Analyse country risk by obtaining a Country Risk Report from Dun & Bradstreet and ‘deep dive’ into the economic factors that cause country risk.
Understand how your services and products relate directly, if at all, to the country’s problems, e.g. you would be unlikely to accept the risk of setting up a financial services company in Venezuela. However, if you provide vital chemicals to assist in their most significant exports (e.g. Crude Petroleum, Refined Petroleum), then the country factors contribute more positively to your risk assessment.
Dow Jones, Thomson Reuters, Moodys & Fitch are expert information providers to refer to when analysing country risk.
- Understand what Trade Bodies and Professional Associations, both in your vertical and the broader credit industry, have to say about trading in your countries of interest.
Investigate your competitors’ stance and financial position in these regions. The Economist ‘Country Risk Model’ is an interactive tool for analysing state and sovereign risk. It is a great resource for facts and projections to help you assess your company’s situation.
- Strength-test your Credit Risk Algorithm against potential loss, and project best-and-worst case scenarios on bad debt and default segments.
Know precisely the profit and loss on your services, and ensure you put benchmarking exercises in your Credit Policy to test risk vs. reward.
Factor into your Credit Policy the real cost of the risk of trading in challenging countries, e.g. cost of Days Sales Outstanding (DSO), Days Beyond Term (DBT) and Debt Recovery/ Litigation Costs.
- Source the best Credit Reference Agency (CRA) for your country of interest and ensure the CRA is a ‘primary’ data supplier in that country.
The CRA world is quite incestuous in that most buy and sell to one another. The key differentiator is the level of detail and amount of information they provide on companies in each country, e.g., a reseller of a prime data source in the country will often have a Level 2-3 of information available. In contrast, the original data supplier will have a maximum level of maybe 4-5 as the data digitiser and true owner.
Investigate what official financial information you need to file according to local law – www.iaca.org/internationalbusinessreport is a great resource for this.
Ask your tendering CRA’s to confirm, in writing, how they source their data and if they can disclose who their data partners are along with their exact level of coverage.
In difficult territories where financial filing laws are relaxed, it is advisable to have more than one data provider so you can source more support. Fresh investigation reports are often required because financial information is not readily available.
Factor into your client onboarding/sales process the delay you will have in running your risk assessment; ensure all company stakeholders understand the restrictions you have.
In addition to traditional information used in risk assessment, e.g. credit reports, innovation is key in trading with difficult countries. Be prepared to investigate companies via social media and industry trade publications. This information can provide a far more accurate assessment of their ‘live’ credit status than historic filed accounts.
- Protection and preparation for the worst, is vital when trading in difficult territories.
Review and consider all ‘tools of the trade’ in your AR process, especially ones that you wouldn’t require or use in more accessible countries.
Factoring and Invoice Discounting may be an attractive route if you can accommodate the increased cost of sale. Banking may be risk-averse, so not offer this service in countries with high Sovereign Risk. You may find local in-country commercial finance companies that would take the risk however. Refer to local Chambers of Commerce and the International Monetary Fund to find local Financial Institutions (www.imf.org).
- Credit Insurance is an obvious route to explore when you increase your business trading risk. However, you need to ensure you explore all products and services.
Underwriters offer products which protect your revenue. Retractable cover in an unknown territory, and high-risk market for you, would be disastrous! Work with a global broker who has experience in your vertical; they will be best placed to advise you and you can reference their experience and client satisfaction.
There are new and particular underwriters that cater for high risk and difficult territories. Traditional service providers may have high exposure in your country/industry of interest but, another more ‘niche’ underwriter may be open to taking a risk that others will not.
- AR Documents and increased due diligence are required when working in some countries.
It is imperative that your client terms and conditions adhere to local law and that they are not merely a translated version of your UK terms that are drafted according to UK law.
Trying to enforce contracts in local courts that are not consistent with local legislation and terminology is a minefield. Have your contracts drawn up by local lawyers who have proven expertise in legal debt recovery and, preferably, ones who have extensive experience in your industry vertical.
- Letters of Credit are a great tool to use in your Credit Policy.
There are five types of Letter of Credit and you need to ensure two essential elements are present when you utilise them:
-
- The bank is approved and part of the International Monetary Fund (imf.org)
- The Letter of Credit suits your business and trading transaction. Ensure you fully understand and monitor your due diligence.
We see China and Latin America as increased Countries of Trading Risk. You can access our Country Risk Reports on some of these Countries, for reference, and Factual information on the Countries’ Legal Systems, on our Resources page