Trading overseas - avoiding export debts

Do your homework

That's why it is so important for a company to do its homework before starting a relationship with an overseas trade partner, both in terms of the customer and the specific country. UK businesses need to be confident that their new overseas customers are a good credit risk, as well as ensuring that the industrial sector they are exporting to is not on the verge of collapse. Local intelligence is vital for this kind of information, but also to discover if there are any laws or regulations that could cause payment problems.

As an example, recovering a debt through the courts in the Czech Republic can take almost a third longer than the rest of Europe, around 300 days compared with an average of 229 elsewhere in the EU. If the courts fail and the customer is made bankrupt, insolvency in the Czech Republic can take more than nine years to come to fruition compared with an average of less than two years across the rest of Europe.

If a debt dispute goes to court in Poland, it is not only lengthy – around 1,000 days, almost five times longer than in the UK – it can also be expensive as the case gets bounced around the legal system. So it's best to be prepared and avoid legal action if at all possible. Collection letters or dunning letters are not always effective in Poland, so a collection agency will be more successful in recovering a debt.

In Hungary, on the other hand, collection reminders are more effective if signed by a local lawyer. As with the UK, debtors can be charged interest on late invoices, currently 7% over the bank base rate. If your customer goes bust in Hungary you can pretty much forget about getting any money back as insolvency legislation suffers from a lack of debtor control. In 95% of insolvency cases there are not enough assets left to satisfy creditors.

There are a number of ways of uncovering intelligence about the countries and clients UK companies plan to export to, such as using an organisation like Atradius, which has access to data on more than 45 million businesses around the globe plus a worldwide network of 40 offices.

A step-by step approach

The first step is to credit-check new customers to ascertain their level of risk. The next step is to agree credit terms, although the majority of European customers expect open account credit terms, which entails the highest amount of risk. Customers in less developed countries are still willing to provide letters of credit or even payment in advance, but this is unusual in Europe.

If a UK exporter does have problems getting paid the company should turn to a debt collection agency with international experience and knowledge of the country's legal system. But the best protection of all against a bad debt is credit insurance as it vets the customer for credit risk. If things go wrong and the export company suffers a bad debt, credit insurance will pay up to 90% of the value of the original invoice.

Considering currency

As sterling has become so strong against foreign currencies in recent years it is worth bearing in mind the effect trading in different currencies can have on export incomes. According to HM Customs and Excise figures from 2002, 51% of UK exports were paid for in Sterling, with 26% in US Dollars, 21% in Euros and the remainder in other currencies, usually the local denomination. If exchange rates shift, a Sterling sale set to make a tidy profit several months ago could end up with a much smaller or no profit at all when the invoice is settled.

There are a number of ways of protecting profits against the impact of exchange rate fluctuations, such as agreeing prices in Sterling, setting up scheduled pre-payments or using products which protect companies against the impact of currency changes on their final invoice against their original tender price.

Exports provide British companies with a great opportunity to sell their wares, grow their businesses and increase profits. But it is important that exporters approach overseas markets with caution. They must find out as much as possible about their customers and their marketplace and take steps to ensure that good business does not turn in to bad debts.  For advice in this specialist area contact Prime Chartered Accountants in Coventry on 024 7622 0208 or Solihull 0121 711 2468.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

Fact sheet produced July 2007