The United States is one of the largest and most enticing markets in the world, and selling to this potentially lucrative marketplace is a goal of almost every company worldwide. But, the buy-now/pay-later approach of U.S. businesses and consumers presents some challenges to exporters.

While selling on credit to known and well established U.S. companies is not necessarily a great risk, it is not uncommon for buyers to pay later than the agreed-to terms of sale. And, the laws, along with the expense of litigation, are such that if a buyer really does not want to pay, it is relatively easy for him to get away without paying.

Therefore, doing everything possible to protect its interests should be one of the main considerations of any company exporting to the U.S. market.

Before the Sale

Credit Application

Requiring a signed credit application from the potential U.S. buyer can enhance your legal position should things go wrong with the sale. Be certain the credit application clearly delineates the precise legal entity seeking credit along with relevant state or national identification numbers. Include the following “extra” clauses:

Final & Binding Arbitration. Constructing an arbitration clause that reflects your location and language, as well as the name of a competent arbitration authority in your country, provides a tactical advantage over the debtor by forcing the venue and forum for any dispute resolution.

The legal authority for the strength of arbitration in the United States is found both at the federal and state levels and has been upheld by the United States Supreme Court. Internationally, the relevant cite for enforcing arbitration awards can be found under the 1958 NY Convention on the Enforcement of Foreign Arbitration Awards. All 25 members of the European Union are parties to the convention. The full text of the treaty can be found at www.adr.org.

The most common defense used by debtors against arbitration awards is their claim that they never received the notice of arbitration. Therefore, it is a good idea to hire a process server to hand deliver a copy of the notice to the U.S. debtor, thus contravening such a defense.

Terms and Conditions. Interest on unpaid accounts is only enforceable in all U.S. states if there is an agreement between the seller and buyer beforehand. The agreement must clearly state when the account will become past due and subject to the interest charge. In addition, costs of collection can only be recovered from a U.S. debtor if a document, signed by the buyer, specifies such. At least 10 U.S. states forbid recovery of collection costs as "against public policy," even if provided in a credit application or sales contract. However, expended court costs (for filing fees, service of process, etc.) are legally recoverable in all states and added to the amount of the final judgment.

Personal Guarantee. A staggering number of businesses in the U.S. do not survive their first five years of operation. A personal guarantee allows you to claim payment from the owner’s personal assets should the company default on payment.

Two other ways to improve chances of receiving payment from a U.S. buyer include:

Written personal guaranties of payment from principals of the debtor company including partners, shareholders and spouses.
Security interest in the various assets of the debtor company. If possible, the security agreement should provide a security interest in inventory, equipment, furniture, fixtures, accounts receivable, as well as the goods you sell the debtor. Security agreements are governed by the Uniform Commercial Code (UCC).

Sources of Credit Information

Thanks to the growth of the World Wide Web, there are many sources available to obtain credit information on U.S. companies, including credit rating agencies like Dun & Bradstreet and Experian, company profile sites like Hoovers.com, public records sites maintained by individual states, bankruptcy sites like BankruptcyData.com, etc. Most require a subscription fee, but a fair amount of information is available free.

Privately held corporations are not required to disclose financial information, and most will not. Quarterly financial filings of public companies (called 10-Ks) are available free at Edgar (www.sec.gov/edgar.shtml), a web site of the Securities and Exchange Commission.

Industry Credit Groups

A resource for trade credit data not well-known outside of the United States, although gaining in popularity in Europe, is the industry credit group. Credit groups are members-only organizations that share factual credit information on a common customer base. Credit reports generated from this shared data fill the gaps in generic credit reports. Information is generally more accurate, more relevant, more timely and less expensive.

When the Buyer Won’t Pay

Unlike fine wines, debts do not get better with age. The probability of collecting a trade debt is a direct correlation of the length of time allowed to pass before escalating the matter to an outside collections resource. In the United States, experts generally recommend that a past due account be referred to a collection firm no later than 90 days past due. Even at that point, the likelihood of collection is just 73%. Waiting six months reduces the chances of collection to 50%, and waiting a year to only 25%.

Selecting a Collection Firm

The U.S. collection industry is inundated with service providers. There are approximately 6,500 collection agencies, most of which handle mainly consumer accounts, and any number of attorneys specializing in collections. Some foreign firms also have offices, or more often, collection partners in the United States.

The number of U.S. firms specializing in commercial collections is significantly lower. Approximately 100 agencies are members of the Commercial Collection Agency Association, the organization that self-regulates the commercial collection industry.

Generally, a foreign creditor should look for a reputable, national collection agency. All U.S. agencies charge contingent fees, with rates based on size of claim, age of account, and overall volume of business you will be forwarding to them. U.S. contingent fees are generally higher (sometimes considerably), than fees charged by European agencies for European collections. Standard rates for commercial collections can typically be 25% or 20%.

Look for an agency that:

Has been in business a significant period of time;
Is a member of the Commercial Collection Agency Association of the Commercial Law League of America, or ACA International; and
Is licensed and/or bonded in the states where your debtors are located. Not all states require licensing of commercial agencies. If in doubt, contact the local Secretary of State’s office for information on requirements.

U.S. Collection Procedures

Most debt collection in the U.S. is done by phone. In-person visits are rarely required, but are possible. If escalation to the collection agency does not result in payment, the firm will usually forward the account to an attorney in the debtor’s locale. The attorney will first attempt to collect the account amicably, and if this fails, may recommend legal action.

Fees during the attorney amicable phase are almost always contingent. If legal action is instituted, court costs are required and most attorneys will require a non-contingent suit fee or retainer (applicable to an overall suit fee of 10%). Court costs vary depending on jurisdiction and the extent of work to be done, but generally range from $250-$500. While most judgments include an award for court costs and reasonable attorney’s fees, the extent of the award is strictly at the discretion of the court.

When to Sue

Litigation can be expensive and time consuming in the U.S. However, one of the most important tools a collection attorney brings to the table is his ability to file a lawsuit.

Up to the moment of filing the suit, the debtor has not had to make any choice other than whether to make a payment or not. Once a lawsuit is filed, however, the debtor is faced with a new decision. Should he pay money to retain a defense attorney or should he put those dollars toward paying the bill? If the creditor decides against authorizing the suit, the entire process is short-circuited. The debtor avoids the dilemma of making this decision, and wins.

Assuming the creditor’s case is bona fide, many cases never go to trial. The majority are resolved before they are scheduled, and many are settled once the trial date is set. But, the opportunity for a negotiated settlement is lost when the creditor chooses not to sue.

The requirements to prove a valid case are fairly straightforward and can usually be met by presenting the basic documents exchanged during the sales process, including the signed credit application, signed purchase order, and delivery receipt. In order to win, however, the creditor must provide a qualified witness with firsthand knowledge of the case facts and familiarity with the documents being introduced into evidence. That witness may be compelled to attend both a deposition and, later on, a trial if the case is not settled.

Conclusion

The U.S. market is too large and potentially profitable to ignore. However, the potential of defaulted payments is very real. Ensuring that each step in the credit granting and sales process is properly documented, and utilizing added protections to secure the sale, can go a long way toward making the experience a positive one. And, the steps taken after a sale goes bad can have a huge impact on the ending results.

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David Greenberg, Divisional Vice President, International Operations for ABC-Amega Inc., has served on the Panel of Commercial Arbitrators of the American Arbitration Association and is a current member of the Commercial Law League of America and the Association of Executives in Finance, Credit and International Business. David has traveled the world, giving educational presentations in the areas of international arbitration, foreign documentation, and credit reporting management.

ABC-Amega is a US-based commercial receivable management firm providing collection services in all 50 US states and more than 200 countries worldwide.