Why are the changes happening now?  For one, the high volume of distressed businesses in Europe has exposed holes in European bankruptcy laws.  Moreover, the changes seem to be preemptive in advance of the expected spike in bankruptcy cases as a result of the wave of debt refinancing that needs to take place in Europe over the next three years at a time when banks are struggling.

The changes in the laws are centered around importing elements of Chapter 11 previously unheard of in Europe – fresh financing, “cram downs” of debt restructuring on reluctant creditors, and debt-for-equity swaps that could open the door to new investors.  While these changes have resulted in an increase in filings already, there is still much more of a stigma about bankruptcy in Europe than there is in the US, and it may take a while before the concept of bankruptcy for the purpose of restructuring becomes as commonplace in Europe as it is here in the US for distressed companies.

Brazil is the world’s 6^th largest economy with
an impressive and diversified economy. While its economic growth has slowed somewhat in 2012 as demand for its products, especially commodities, has weakened, Brazil is still a very tantalizing export market for the near future.
Bolstered by the upcoming FIFA World Cup, and the 2016 Olympic Games,
economic growth is expected to return to Brazil next year, in the range of 4%.

While it is an enticing market, Brazil’s bureaucracy and complex tax system make it a challenging place to do business.  In order to provide some guidance to help you
trade successfully in Brazil, here are 10 steps as offered by Atradius, a leading global credit insurance underwriting company.  Following is a brief write-up of the 10 steps – for the complete article, please email a request to me at gene@traderiskgroup.com.

1. Choose the law you feel comfortable with –
your law or Brazilian law.

2.  Understand the Brazilian way – have patience to develop personal relationships;    understand that time is a flexible concept in Brazil; the importance of dressing well.

3.  Regulation, regulation, regulation – understand licensing requirements

4.  Consider local representation – the value of appointing a local agent.

5.  Comply with competition laws.

6.  Be sure that the right people approve – verify the corporate authority of the
people that you are dealing with.

7.  Secure your payment.

8.  Seek good tax advice.

9.  Consider where you want to resolve any disputes.

Condensed and reprinted from Atradius – November 2012

Effective earlier this year, all Argentinian importers must fill out a Sworn Affidavit of Intention to Import (Declaracion Jurada de Importacion, or “DJAI”) with the Argentine Tax and Customs Authority.  The authorities determine if the goods can also be purchased in Argentina.  If the goods cannot be acquired in Argentina, a permission “to import” could be granted to the importer.  This new requirement is an attempt by the federal government to protect the local market, and to prevent currency export.

If you are exporting into Argentina, it is now important to confirm that your customer in Argentina has received the DJIA, and that they have obtained permission to purchase foreign exchange to pay for the imported goods.

The creation of the DJIA system also impacts the procedure for importers to buy currency to pay for imports in advance.  The Central Bank will only transfer foreign currency when a DJIA and “proofs of import” have been approved by the relevant agencies.  In case of prepayment, this is not possible – there are ways for importers to receive approvals, but these are complicated and time consuming.

While WTO members, the US, and the EU have expressed their concerns about these trade-restrictive measures, Argentina appears committed to enforcing them.  Additionally, given the fluid nature of these measures, exporters into Argentina are advised to check regularly on the latest implementations of import regulations.

One misconception about credit insurance that I see frequently in talking with companies that are looking into it for the first time is that they assume that the insurance company will require that they insure all of their receivables.  Historically, credit insurance companies focused primarily on promoting these “whole turnover” policies.  For them, whole turnover programs are attractive in that they provide the broadest spread of risk, and the largest premium.  For many Insureds, whole turnover programs  provide their intended value, giving broad based protection utilizing “discretionary coverage” that enables companies to self-approve coverage on smaller exposures, and use the insurance company to approve credit on the larger customers.  These policies are good tools for companies that are looking to grow sales, that have adequate credit controls and procedures in place, and that have a large number of customers at small to mid sized exposure levels that they want to insure.

However, there are many other ways to structure credit insurance policies besides using a whole turnover concept.  For example, policies can be structured using a “Key Account” concept – isolating your top 10, top 20, top 4 customers, whatever your objective is, and tailoring the policy to just cover these customers, effectively using credit insurance as a hedge against a significant or catastrophic bankruptcy.  Policies can be structured to cover export business only, or only sales made by a specific division of your company, sales into a certain trade sector, single exposures on either an ongoing or one-off basis, exposures excluded from your securitization program due to concentration issues, etc.

There is a tremendous amount of flexibility in how credit insurance policies can be structured, and a number of techniques that can be used to arrive at a policy to meet your risk transfer and premium spend objectives.  If you have a specific objective in mind for using credit insurance, give us a call to discuss.

Gene Ferraiolo – Trade Risk Group – 610.353.1785

 The Atradius Practices Barometer, a survey of B2B suppliers of products and services in North America, found that on average, 5.3% of the value of receivables of B2B companies is written off as uncollectable, compared to 4% one year earlier.  In the three countries surveyed, the change in the percentage of receivables written off is:

 Canada:         2.9% in 2011 to 5.2% in 2012

Mexico:           4.3% in 2011 to 5.2% in 2012

US:                  4.6% in 2011 to 5.6% in 2012

 InCanada and the US, foreign receivables had a higher uncollectable percentage than domestic.  In Mexico, the domestic receivables had a higher uncollectable rate than foreign receivables.

 The survey found that, while overall the percentage of late receivables has not increased much from last year, more of the overdue receivables are remaining outstanding longer.  As a result, average Days Sales Outstanding across the region has been creeping up.  For the survey respondents, average DSO is 50.7 days inMexico; 38.0 days in theUS; and 36.8 days in Canada.

October 2, 2012

 One solution is a Trade Receivable Put.  A Trade Receivable Put is a financial contract that gives you the right to sell, or “put”, your outstanding accounts receivable to the Put Writer at a predetermined price in the event that your covered customer becomes insolvent during the term of the contract period of the Put.  There are a handful of Put Writers, typically banks, and assuming that they have an appetite for covering the specific debtor that you want to get protection on, you can typically get a quote covering up to 100% of your exposure for either 6 months or a year.  The pricing of Puts is higher than credit insurance due to the nature of the debtors that are covered, and the pricing can fluctuate significantly based upon supply and demand until you “lock in” your rate.  However, if your margins support it, Puts can provide valuable protection while dealing with distressed customers.

With the advent of just in time delivery, many suppliers perform an essential customer service by ordering or manufacturing, in advance, products specifically required by the customer. If these products are customer specific, they will ultimately have to be written down as obsolete or sold at considerably less than market value. This is often accounted for differently and never really tagged as part of the bad debt, although it arguably could be.

Annual budgets look ahead and sales forecasts cascade down to individual customers. Product sales and margins are predicated on the retention and growth of these identified customers. A bad debt removes this opportunity from the mix and the void must be filled from among the existing accounts or a concerted prospecting effort must be undertaken to find a volume/margin replacement. If neither is found, these lost sales become very measurable.

If the bad debt is significant, it might induce a sales territory realignment to balance out the lost revenue among all of the sales representatives. This would make sense if the bad debt were a disproportionate contributor to one’s individual sales budget. Matching customers with new sales representatives could be disruptive to some relationships and actually inhibit sales growth in the budget year. Again, there is potentially a bottom-line impact stemming from this business failure.

Bad debts are financed out of a bank line. The reduction of bank availability because of this loss would mean funding for specific projects, like new product development. Programs may have to be curtailed. Companies need to continue to advance and remain competitive. The impact of not having access to these resources will have a much longer term effect on the overall business.

Depending upon whether it’s the size of the bad debt or just the number of bad debts incurred during the course of a fiscal year, there will likely be a philosophical adjustment internally that could also affect business. If the credit department reacts by “tightening up” on credit granting, sales growth opportunities could be missed for all the wrong reasons. If a similar attitude is applied to collections, customer goodwill could become an issue with many simply moving their business elsewhere. Again the notion of losing existing or anticipated sales becomes a significant one with a negative effect on profitability.

All of these considerations and the impact on current business are often not linked to the actual bad debt “principal” loss. Conventional accounting provides no basis for doing so and therefore any tabulation of these costs, real or otherwise, would likely have to be booked informally.

While bad debts typically fall within the domain of the credit department, the true cost of losing a customer has both short and long-term consequences for the company. Therefore, recording the principal loss is in reality an understatement, if these others factors are not recognized in some form or another.

To find out more about how credit insurance can help you safely expand your export business, give us a call.

If you take steps to manage your receivables by applying the right kind of pressure at the right time, the beast can be tamed. Following are seven steps:

The First Rule: Those who expect to get paid – get paid
In the administration and control of receivables, attitude counts. We’ve discovered that if you expect to get paid, and the other party knows it, and knows you’ll take action if you are not paid, you will get paid.

It’s simple: If you take it seriously, they’ll take it seriously. On the other hand, if you treat receivables lightly, and allow your customers to take advantage of you, they will. What does “taking it seriously,” mean? It means:

• Establishing policies and procedures that will help you make decisions as and easier.
• Making a commitment to properly train yourself and your employees in how to manage and collect receivables.
• Being certain your customers understand your terms and intentions.
• Understanding and using the tools and services that are available to you.

The Second Rule: Do Something Every Twenty Days
Nothing is more effective than a systematic, controlled approach to receivable management. Step-by-step procedures are the key:

We have had great results with a process we call the “Twenty Day Diary.” Here’s how it works:

• Day one, you make a sale, deliver products, and issue an invoice with terms set at NET 30 days.
• Twenty days later – ten days before the receivable is due – you call the customer. This is a pre-collection call that doubles as a service call.
• You ask if the order was received, if everything was satisfactory, if they have the invoice, and if they understand the terms.
• If there is a problem, you have a chance to fix it before the due date, and everybody is happy. If there is no problem, you know the customer is satisfied and is likely to pay on time, and the customer knows you care.
• The next call (if necessary) is then scheduled for twenty days after that – ten days after the due date. If a genuine problem has arisen, it’s early enough to deal with it efficiently. But if your being stalled, you’ll know that, too, and you can act accordingly.

The secret is to be systematic and organized. We call it the “Twenty Day Diary” because to make it work, you have to keep track. Write down what was said, when, by whom, every step of the way, and you can’t go wrong.

The Third Rule: Don’t Turn Your Back on Them
Extending credit to another company involves risk. Of course, in most cases, the risk is part of the cost of doing business, and it is acceptable…so long as it is managed properly.

Even if you were not able to apply any other Rules to your business, we urge you to apply this one. Why? Because untended receivables can get out of control in the blink of an eye. And out of control is the first step towards being out of business. Here are some danger signals you can watch for:

• Slow payments or a change in payment habits
• Broken promises of payment
• Unreturned messages
• Postdated or NSF checks
• Refinancing or changing banks
• Unauthorized return of merchandise
• Selling at unusually low prices
• Radical changes in buying patterns
• Too rapid growth

The Forth Rule: Don’t Show them any Weakness
It’s called “sticking to your guns”. When you set terms, be determined to communicate them and to stick to them, no matter what. Remember, a deal is a deal. You’ve fulfilled your obligations, now it’s their turn.

You do it by stating your terms and intentions with clarity and firmness. If you are vague and easygoing about your terms, it’s more likely that people you deal with will be vague and easygoing about paying you.

It’s important to develop a set of reasonable terms and condition and it’s important to make them part of your sales contract.

A world of advice: If you don’t actually tell them your terms, you cannot assume that they understand or accept your terms. You cannot assume that the other person is a deadbeat just because the bill wasn’t paid on time. The truth is that many disputes and late payment situations arise through simple misunderstandings.

One more thing. Remember to explain your terms and conditions to your own employees. It’s a common mistake to assume that your own people are well informed about how you conduct business.

The Fifth Rule: Don’t Be Afraid to Escalate
If you find yourself with a collection problem on your hands, the important thing is to get control as fast as possible and keep pushing for results.

The key is to recognize when the process is stalled, and be prepared to use a stronger approach each time you make contact. If you are using the “Twenty Day Diary” (see second rule), you should know after the first or second call whether or not you have a problem. At that point, the receivables is still just a few days overdue, and you already know your customer’s intentions.

If you believe they intend to pay, you can make an arrangement that will satisfy both parties. (Remember to confirm it in writing).

If you believe they will not pay, escalate your actions. Without hesitation.

There are many things you can do to apply increased levels of pressure, ranging from pre-collection letters and demanding notices to full-scale personalized collections and ultimately, legal action.

As you go through the process, remember this: It’s your money. And sometimes you don’t get paid if you don’t push.

The Sixth Rule: Say What you Mean and Mean What you Say
We have already said that in order to prevent problems, it’s important to set terms and stick to them (the Fourth Rule). The Sixth Rule extends that thinking to situations where a problem already exists and your trying to collect.

During the process of making a collection, you should use the call to:

1. Push for a resolution (you get paid) or
2. Establish the next steps to be taken (call back, send a courier to get a check, repossession, legal action, ect.)

To keep your control, you must keep your word. If you say you are going to call back for an answer or a response at 2:00pm on Tuesday, do it. If you tell a debtor that you are going to cut off their credit, do it. If you tell them that the matter is going to a professional collector, send it.

If you keep your word, and do exactly what you promise, you will always have the upper hand, and you will have a better chance of collecting.

The Seventh Rule: Don’t Go Swimming Alone
It is understandable that some people are reluctant to make collection calls. After all, discussions of money can be uncomfortable and nerve-wracking. The “buddy system” is your best defense. The key is to plan your call, and then, if you get nervous, find a buddy and rehearse it. Take a few minutes with a co-worker, organize your facts, discuss what you might want to say, and, most importantly, decide what you want to achieve with the call.

Make a list of objections you might hear, and determine how you will handle them. For example, what if the person you are trying to collect from responds with the classic line, “the check is in the mail”? Most people will feel relieved and say “Great! Thank you very much: and end the call. Big mistake. Your response should be:

• When was the check mailed?
• What was the check number?
• What was the amount on the check?
• Who was the check mailed to?

Keep in mind that your collection won’t succeed if you allow yourself to get stalled. So, when it happens, call in for reinforcements. Use the resources available to you.

For more information, please send us a message. Or, if you prefer, in the United States you may call 1-800-333-6497.