Opting to extend credit to an international customer is a difficult decision to make. When you give credit to a customer you are in effect loaning that customer your money. This is tough enough when you’re dealing with customers in the United States. Evaluating the risk attached to an international customer is even more difficult, especially when the customer is a company in China’s rapidly growing private sector.
What are some of the differences in risk evaluation of international customers versus domestic customers?
Much of the credit-evaluation process is the same. Read about the company on the Internet. Find out who the company’s customers are and read reviews of its products and services. This works well when a company has an online presence and customers writing reviews and comments. But the further a company is from the consumer market, the harder it is to track down information using public sources. And of course it doesn’t do much good to search Chinese Web sites if you don’t read Chinese. You need solid business information on the company: Has it been paying other vendors, what is its financial condition, how is business right now?
There are other factors to keep in mind. Remember, other countries are other countries. They don’t follow U.S. laws and aren’t subject to U.S court orders. That doesn’t mean that they don’t have their own contract laws, but the terms and remedies for breach of contract may be different. The terms may or may not be enforceable if your contract reads, for instance, “This contract is subject to the laws of California.” This is true for Europe as well as Asia.
Of course, you should not reject international business just because it’s international. International trade couldn’t possibly flourish if contract law were not understood and agreed upon by trading partners. But if you own a small company, enforcing the terms of a contract or collecting bad debt will be a much more expensive proposition in a foreign country, say China, than in the United States. So take this into account when you do risk evaluation.
One way to find financial information on international companies is through credit bureaus, some of which can supply good information on overseas companies. This is a very cost-effective way of evaluating the creditworthiness of an international company. There are seven major sources of international commercial-credit information: Cortera, Dun & Bradstreet, Equifax, Experian, LexisNexis Corporate Affiliations, MarketWatch, and Yahoo! Finance.
The first and most important piece of information to gather about a company is who the customer is. Ask your potential customer if it has a data universal numbering system number. If a company doesn’t have a DUNS number it’s a red flag, although this shouldn’t necessarily disqualify it from consideration. A DUNS number means it’s more likely you can get accurate information from a credit bureau.
Evaluating an international credit report is similar to evaluating a domestic report. Look at the net worth, cash on hand, accounts receivable and accounts payable, public records, liens and suits, sales, and the company’s start date.
Another tool you can use to reduce risk when extending credit abroad is a letter of credit. Letters of credit function by substituting the credit of the bank for that of the customer, for the purpose of facilitating trade. There are fundamentally two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction, whereas the standby letter of credit is a secondary payment mechanism. This can be especially useful when dealing with small or unknown international customers.
If after your evaluation you’re still unsure of the creditworthiness of an international company, it’s probably best to pass on the business or require an up-front payment. Remember, it’s your money.
John C. Shovic is a partner at MiloCreek Consulting in Coeur d’Alene, Idaho.