In the current environment, the rules have changed in terms of availability to credit. As a consequence, the increasing pressure on cash flow is showing no sign of easing. Some overseas companies, in much the same way as some of those based in the UK, are conserving cash by paying suppliers later than usual or attempting to avoid making any payment at all. This slowing of cash flow puts pressure on suppliers who, in turn, put pressure on their own suppliers – and so the cycle goes on.
The continual rise of globalisation is providing a challenge for all those concerned with credit control. China and India’s economies continue to grow apace. As a result, many more western companies are entering into overseas business deals to remain market competitive and are finding that language barriers and cultural differences can lead to slow payment and misunderstandings.
The good news is that no matter where the debtor is based, often all that’s needed is a nudge in the right direction to get a payment made without further delay.
This is evidenced by what we see here in the UK. Well over 80% of letters before action (LBAs) issued by Lovetts on behalf of our clients chasing UK debtors achieve their intended aim and the case does not proceed any further. A still more sobering statistic is the 20% rise in the number of late payment demands (LPDs) issued by Lovetts in the first quarter of 2011 against the same period in 2010.
Businesses have become much less willing or able to tolerate late payment and are increasingly exploiting their right to recover interest and compensation rather than just send out a standard LBA.
How to Manage Overseas Business Partners
So what else can businesses do to help control risk when dealing with companies based overseas? It may seem basic business sense, but the starting point has to be the use of the common sense solid credit management procedures:
- Make sure you know who you are dealing with by checking the true identity of your client and ensuring they are creditworthy through a credit check. There is an increased risk when dealing with a customer not based in the UK.
- Obtain acceptance of your terms and conditions (T&Cs) in England and Wales. For overseas contracts this will ensure contract formation within home jurisdiction.
- Make sure your paperwork is accurate and timely, leave no room for error.
- Resolve any queries promptly.
- Consider credit insurance cover.
It’s also critical that businesses protect themselves against bad debt through a set of robust terms and conditions:
- Ensure your T&Cs allow you to charge overdue interest and compensation for late payment.
- Consider including a clause so that you can claim immediate payment on invoices not yet due.
- Where you need third party assistance in recovering the debt make sure you can pass on the charges to the debtor.
- For overseas customers, make sure your terms give you the right to suspend on-going shipments when default occurs.
- Stipulate clearly that the law in England and Wales governs the contract.
Of course, the additional challenge for exporters is to ensure rigorous processes are in place to tackle late payment when the debtor may be on the other side of the world and operates in a completely different language. Agreeing which language will be used for the contract and subsequent communications is therefore a crucial starting point as is ensuring that when chasing payment you will be able to do so in your mother tongue.
It’s also worth remembering that if you litigate, documents may need to be translated and personally served on the debtor.
While all this groundwork won’t protect businesses from the risk of late payment it will put creditors on firm ground for any legal action necessary.
Getting to the Front of the Queue
Then next step is to get to the front of the queue for payments by making sure it’s more expensive for your debtor to delay paying you. This can be done in several ways:
- A solicitor’s LBA implies court proceedings and costs being added to the debt. The cost of an LBA is tiny compared to the impact it generates.
- Late payment legislation can be a powerful weapon in your armoury. Ensure you spell out your full claim for costs, interest and compensation in your first late payment demand letter to the debtor. The late payment legislation will only be an option for your business if your terms of business have no existing interest provision for late payment or expressly include direct reference to the legislation.
- Instruct debt recovery lawyers sooner rather than later. Delaying action only adds to the risk of not being able to recover the outstanding debt.
We’re operating in a very changed and challenging economic environment and what was acceptable pre-recession is no longer acceptable now in terms of persistent late payment. So get the basics right first, know who you are dealing with, agree the T&Cs of payment using compensation and late payment interest and leave no room for miscommunication through language difficulties for overseas contracts.
With the bases covered you can then focus with confidence on getting business done whether you are trading with clients in the UK or abroad.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?