Recovering debt is a tough task. Tougher if it is an overseas default and the buyer is using “distance” to delay or completely avoid his dues. How do you ensure that your receivables don’t turn into a bad debt or that you are paid on time? Persuasion is key, but given barriers such as language, culture and geography, sometimes giving defaulting buyers a scrub through debt collection specialists becomes necessary.

The Dollar Business Bureau | August 2015 Issue

Saravanan, proprietor of Shannvathi Impex, a Salem (Tamil Nadu)-based manufacturer of coir products, had a forgettable experience with his first overseas consignment to Malaysia. He shared his bad deal with The Dollar Business a few months ago. “I dispatched my first overseas consignment to Malaysia, but got into trouble. The importer closed his office after receiving the consignment. While the efforts are on to catch the buyer, I have been forced to limit my international transactions, both in terms of value and volume,” he told The Dollar Business. We gave him a solution.

Interestingly, Saravanan is not the only one in a predicament. There are exporters across India, who have been conned, time and again, while dealing with overseas buyers. And not just small and mid-sized exporters, even the big fish, at times, find it difficult to realise payment from their international buyers. Result: While a few of them, particularly small and mid-sized firms, become export-averse, others continue to take the plunge and drown their investments many-a-time.

Catch-22

It’s not that Saravanan has not been receiving export inquires, it’s just that he is now sceptical in acting on them. The reason is simple. Saravanan doesn’t want to relive the experience where his overseas customers turn rogue and he ends up getting duped. Though this is not how he wants to run his business forever, the problem is he doesn’t know a way out the quandary. Talk about exports and he is afraid of his own shadow.

Let’s face it – recovering debt is always a difficult task. Actually, always! The process is even more daunting when it comes to collecting an overseas due. There are several barriers that must be overcome, such as language, culture, legal and, of course, geographical distance. Certainly, credit risks can jeopardise the continued existence of a company. But then, nobody likes to limit growth just because some money is at risk. So what does an exporter do if he wants to expand his overseas business without fear of loss? Of course, a know-how of the rules and regulations of debt collection in countries you export to is a must. But what if we say that there are as many ways to collect your overseas debt as there are countries in the world? And we are not exaggerating! That’s where international debt collection agencies come to exporters’ help – an agency or a legal expert that can watch an exporter’s back, while he is busy doing what he does best.

Two steps away

While the exporter community in India is just waking up to the benefits of hiring a debt collection specialist, it’s a common business practice among exporters in developed nations when it comes to resolving late payments. Several international players like France-based Euler Hermes, Switzerland-based M.A.H. International Corporation, Belgium-based TCM Group, et al, have been collecting overdue commercial invoices for their clients for years now.

The question now arises: How does the international debt collection process works? The answer is: Exactly in the same manner in which it works when it comes to collecting a domestic debt. The only difference, however, is that the international debt collection agency (dealing with your debt) has offices or debt collection partners in almost every country across the globe. And this is what helps the agency deal with cross-border complexity (challenges created by country specific cultural and legal systems that affect the international debt recovery process), an aspect which is missing when it comes to domestic debts.

In short, debt collection is a two-step process. The first step involves attempts to find an amicable solution to the problem. The debt collection agency will contact the debtor, find out why the payment is still outstanding, resolve disputes, if any, and realise the payment without ruining your relationship with the client. If the agency fails to collect the debt via negotiations, only then does it resort to legal action through its network of lawyers in the country in which the payment is outstanding.

In fact, legal action is rare as the focus almost always is on out-of-court settlements. “If the debtor in not cooperating or is adamant to prove his allegations, initiating a legal action is the only option left for us. The client receives full advice on possible litigation, including costs and risks involved. It remains the client’s decision, as to whether a lawsuit is to be filed. The focus always remains on out-of-court solutions,” M. Amendra-Hauser, President & CEO of M.A.H. International Corporation, a Swiss corporation specialising in international accounts receivable management tells The Dollar Business. Although out-of-court settlement is a demanding exercise, both in terms of time and cost, it is still less costly than legal action, the outcome of which is uncertain.

Old is gold

Everything comes at a price, and so does debt collection services. But how does the price mechanism work in this case? And what price tag is attached to such specialised service? Remember the age-old saying – the older the debt gets, the harder it is to collect! Almost all debt collection agencies believe in this philosophy as their fees are based solely on the age of the debt at the time of instruction. While a debt which is up to 6 months old can cost an exporter anywhere between 5% and 15% (of the value of debt to be realised), for debts aged between 6-12 months and over 12 months an exporter might be charged about 10-20% and 20-30% respectively of the claim amount recovered. Further, services like traces or legal action are charged separately and the fee depends on the type of dispute, age, amount and location of the claim. Interestingly, a lot of debt collection agencies claim that they don’t charge a penny if they fail in realising the overdue payment. These are nothing but claims, as almost all debt collection agencies work on retainer model to cover the cost borne towards managing such claims. So don’t imagine you can get free lunch by any chance. At the same time, however high the charges, something is always better than nothing.

A word of caution

International trade is growing steadily and so is the debt collection industry. High profit margins and low-entry barriers make it a fertile ground for fly-by-night operators with the flimsiest of credentials or none at all. It is not difficult to start and run a debt collection agency business today, even for one man shows. The number of such businesses has exploded and everybody is trying to get his piece of market share. This has resulted in mushrooming of a lot of dubious companies which do not refrain from using steps which are against the law or international regulations. Hence, an exporter needs to do his homework before zeroing-in on a debt collection agency to work on his behalf. Else he will perhaps call for bigger trouble. Remember, differentiating between fly-by-night operators and legitimate businesses is the key to your locked payment.

Overseas debt recovery is one of the most complex and costly burdens your export business can face, if not managed properly. If time is money, overdue payments are as good as cash lost. In fact, the longer one waits, the greater the chances of losing the money.

Whether you want to collect dues on your own or hire a specialist is for you to decide. But, the sooner the better. After all, lost trust in exports and reduced consignments in values and volumes don’t lead to higher export revenues.

TDB: Give us a sense of the international debt collection market? How has it evolved over the last few decades?

M. Amendra-Hauser (MAH): The international debt collection market has grown extensively. Not only has international trade increased rapidly over the decades through globalisation. With growth in trade, the market in international debt collection has grown laterally. In today’s interconnected and globalised business world, all you need to run a trading company is a laptop with Internet access and maybe a mobile phone. More and more business is done on credit terms, which leads to more cases of open accounts. At the same time, with a growth in the market, the number of debt collection service providers has increased rapidly.

TDB: So how do you actually go about collecting debt?

MAH: The procedure is actually quite simple. The supplier sells a product or a service, the buyer is either not willing or not in a position to pay, for whatever reason. A collection case is either disputed or undisputed. So the first step will always be to know the reason for non-payment. Knowing the reason for non-payment will allow a solution-oriented and practical approach towards finding a solution with the debtor, also involving the client in the process. It’s about identifying the problem and then finding a solution. That will, however, require the debtor to come forward and cooperate, which in some cases is the main challenge.

TDB: How do you handle a situation where a debtor disputes the debt? Are you authorised to initiate legal action on a client’s behalf?

MAH: It is again identifying the problem to find a solution. The key is a correct analysis of the case, finding the true facts and evidence. Only seeing is believing. Any allegation raised by a debtor has to be proven. Otherwise it remains unsubstantiated. The main approach is having an open line of communication. If a debtor’s claims are valid and he can prove them, the continuation of the recovery process might not be possible any longer. However, as long as the debtor’s claims or allegations remain baseless or marginal, collection procedures continue. Some debtors use false allegations just to avoid payments, counting on the long distance between them and the supplier or try to make a profit by negotiating a discount. If the debtor is not cooperating or is adamant to prove his allegations, initiating a legal action is the only option left for us. We are authorised to initiate legal action on behalf of our client through our international network of partner attorneys. The client receives full advice on possible litigation, including costs and risks involved. It remains the client’s decision, as to whether a lawsuit is to be filed. The focus always remains on out-of-court solutions, however.

TDB: Country-specific legal systems create challenges that might affect the debt recovery process. How do you deal with cross-border complexity?

MAH: We rely on our highly experienced staff and our global partners’ network. Some of the aforesaid challenges can be overcome by the staff working on a collection case, as they gain a lot of experience and know-how on different legal systems. As mentioned before, the aim is always on finding an amicable solution. It is of course useful in some cases to know what possible consequences a debtor could face if legal actions were to be initiated. This is helpful in convincing the debtor to come forward and cooperate. In the end, should a debtor not cooperate, the last resort always is the legal enforcement of the claim. For such steps, we rely on our international partner network to assure that all bases are covered.

TDB: How do you see the debt collection market evolving in the near future, both globally and in India?

MAH: The interconnectivity in today’s business world will grow further and trading globally will become even more easy and accessible for people interested in cross-border trade. More trade volume will also mean a growth in the market for debt collection and trade dispute resolution. The same can be said for India. Exports and international trade are growing steadily also with support of the government. The risks certain exporters are willing to take are high which directly influence the growth of the debt collection market, as does the fact that more and more business is done on credit terms.

TDB: What, according to you, are the major hurdles to the industry’s growth?

MAH: It is easy to open and run a debt collection agency today, even for one man shows. It can be run from home, with only one or two people working, despite their website giving the impression of a large multinational company. The number of such businesses has exploded and everybody is trying to get his piece of this market share. This is of course everybody’s right, however, there are unfortunately a lot of dubious companies which will not refrain from using steps which are against the law or international regulations. It’s because of such companies or fly-by-night operators the reputation of the whole industry suffers and you even come across debtors who try to scare you off by claiming you have violated a certain rule or regulation. It should however be the other way round. A debtor has received a service or a product and has not paid. So he is the one with the legal obligation to pay, quite simply put. The process of finding a payment solution with help of a debt collection agency has to be strictly regulated and a code of conduct is to be adhered to at all times. It is by giving guidelines that the explosive growth of the industry with dubious companies opening their doors can be regulated. International trade will grow steadily and so will the debt collection industry.

TDB: Do you recommend debt collection services to be used in conjunction with credit insurance?

MAH: Yes. There will always be a certain risk when trading internationally, especially when doing business on credit. Combining credit insurance and debt collection services will allow the exporter to keep that risk at a minimum. No debt collection agency has a 100% success rate, so adding another security net is certainly helpful. It, of course, remains the exporter’s decision on how much risk he is willing to take and how much money he is willing to spend to minimise that risk. Having an insurance policy as combined with the support of highly specialised export debt collection experts allows the exporter to receive a full package service.