Trading in Difficult Territories

Trading in ‘difficult territories’ is a topical subject for Senior Credit Professionals. Competitive business environments and sectors means companies must challenge their appetite for risk and expand in emerging markets. Preparing your Risk Strategy and Credit Policy in new and challenging markets however, this is a thorough process and often requires innovative ways of trading. We, 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 (in genuine cases as this can be sited as an excuse), debtors claim they simply can not pay invoices due to Bank Restrictions. How do you resolve these issues and how can you ensure your Credit Policy is strength tested to account for such Factors?

We recommend the following proactive measures be taken when trading in Countries with volatile Sovereign Risk and restricted Currency Controls:

1        Analyse the 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 countries problems e.g. you would be unlikely to accept the risk of setting up a Financial Services company in Venezuela but if you provide vital chemicals to assist in their largest 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 when analysing Country Risk.

2        Understand what Trade Bodies and Professional Associations, in both your industry and the credit industry, have to say about trading in your countries of interest. Investigate your competitor’s stance and financial position in these regions. The Economist ‘Country Risk Model’, An interactive tool for analysing country and sovereign risk, is a great way to provide facts and projection for your business situation.

3        ‘Strength Test’ your Credit Risk Algorithm against Loss and project ‘Best and Worst’ case scenarios on bad debt and default segments. Know exactly the Profit and Loss on your Services and ensure you put benchmarking exercises in your Credit Policy to test the Risk v Reward. Factor into your Credit Policy the true cost of the risk in trading in difficult countries e.g. cost of Days Sales Outstanding (DSO) Days Beyond Term (DBT) and Debt Recovery/ Litigation Costs.

4        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 being 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 country will often have a Level 2-3 of information available whereas the prime data supplier will have the maximum level of maybe 4-5 as the data digitizer and true owner. Investigate what official financial information is required by local Law to be filed - www.iaca.org/internationalbusinessreport is a great way to know is actually available. Ask your tendering CRA’s to provide in writing how they source their data and if they can disclose, whom their data partners are and the exact level of coverage. In difficult territories or Countries 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 the 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.

5        Protection is vital when trading in difficult territories, as well as preparing for the worst. Review and consider all ‘Tools of the Trade’ in your AR process and ones that you wouldn’t require or use in easier client footprint Countries. Factoring and Invoice Discounting maybe an attractive route if you can accommodate the increased cost of sale. Banking maybe risk adverse and not offer this service in countries with high Sovereign Risk, you may find local Country Commercial Finance companies that would take the risk and refer to local Chambers of Commerce and/or the International Monetary Fund to find local Financial Institutions ( www.imf.org).

6        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 provide and ensure any chosen product protects your revenue. Retractable cover in an unknown Territory and high-risk business market for you would be disastrous! Work with a Global Player in the Broker world and a Broker who has specific experience in your industry; they will be best placed to advise you and you can reference their experience and client satisfaction. There are new and specific Underwriters that cater for High Risk and Difficult Territories. Traditional vendors such as Euler, Atradius and Coface may for example have high exposure in your Countries/Industry of interest but another more ‘niche’ Underwriter maybe open to taken Risk that others will not.

7        AR Documents and increased due diligence is required when working in some Countries. It is imperative that your Client Terms and Conditions are applicable to local law and that they are not simply a translated version of a UK version that are subject to UK law. Trying to enforce contracts in local Court 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.

8        Letters of Credit are a great tool to use as a matter of process in your Credit Policy. There are five types of Letter of Credit and you need ensure two key elements when you utilise them:

-         The Bank is approved and part of the International Monetary Fund (www.imf.org)

-         The correct Letter of Credit is used that most suits your business and trading transaction. Ensure you fully understand and monitor your due diligence

We are seeing China and Latin America as increased Countries of Trading Risk. I attach Country Risk Reports on some of these Countries for reference and Factual information on the Countries Legal System.