While referenced in several places specifically to Mexico, the principles presented in this article can be applied to international trade in general.

Whenever you sell on credit, having a sound credit and collection policy, and executing it properly, is essential. Doing business internationally generally increases the stakes and raises the risks. Therefore, when developing a policy for international sales, it is important to recognize that certain distinctions exist between domestic and international trade. There are real differences in legal systems, business practices, and mindsets to be considered. Your credit and collection policy for international sales should be adjusted to reflect these differences. It should not mirror the policy you have in place for domestic sales.

Whether domestic or international, a sound credit and collection policy involves:

knowing who you’re selling to, that is, doing your due diligence on your prospective buyer.
knowing how to sell, this involves getting the right supporting documents for the sale.
keeping a close eye on your money and acting quickly when there is a potential risk. This is especially important when dealing with international sales.

Doing your due diligence

Whenever there’s a potential customer at your door, you have to make sure that the prospect has a good probability of paying. Requesting financial information from the prospect is just the beginning. You need to go beyond that by getting a current credit report from a reliable source in the prospect’s jurisdiction. An attorney or a credit reporting agency can easily obtain information regarding the prospect’s assets and the legal situation of his company, as well as any lawsuit filed against him. Your prospect should be evaluated based on:

Personality. Does the prospect put forth characteristics of integrity, honesty, and moral responsibility? Do you trust him personally?
Capital. Are you comfortable with the financial position of the prospect’s business and how well it is doing? Does he have additional or sufficient assets to secure the debt?
Capacity. Is the prospect really a good and competent businessman? Is he knowledgeable? Does his experience give you the confidence necessary to allow him to influence your cash flow by extending credit to him?

Documenting the sale properly

Making sure the debtor has the money to pay his account is only the first step. Should it become necessary to file suit in order to collect, you need to be prepared with the proper documents if you are to succeed.

There are three essential things that need to be probed in court during a collection case: 1) the debtor’s offer to buy goods; 2) the seller’s acceptance and performance; and 3) terms and conditions of the sale. You can easily probe this with proper documents and give yourself an edge in court, by using and requesting the following items from the debtor as a matter of policy:

Credit application. The credit application with financial information alone will not be effective in court. You should include the terms of sale, a personal guarantee, and even a special pledge (available in Mexico) to create a security interest in the goods you are selling.
Purchase orders. You should request written purchase orders from all buyers. These can be sent via fax, and should include the authorized person’s full name and signature.
Delivery receipts. You should request signed receipts upon delivery. These can be your own packing slips or bills of lading. And they have to include the full name and signature of the individual receiving the goods on behalf of the buyer.

If you want to add security to your transactions, request from the buyer either one floating pagaré (promissory note), executed according to Mexican Law to guarantee the general credit granted, or one promissory note per shipment for that specific amount. If you are selling above $100,000.00 US dollars, get collateral from your buyer to properly guarantee the debt. This is a common practice in Mexico.

Local attorneys with international law experience should always revise terms and conditions of sale. They are best equipped to know how to give you an advantage over your debtors in court.

Keeping a close eye on your money

The latest survey done by the Commercial Law League of America on March 2002, revealed that after three months, the probability of collecting delinquent accounts drops to 69.6%. After 6 months, collectability drops to 52.1%. And after 1 year, the probability of ever collecting a delinquent account drops to 22.8%. This means that you have to act fast. Don’t let delinquent accounts grow old. Of first importance is having a strict collection policy. Establish it and stick to it. It should include a final dateline for debtors to pay their outstanding invoices. A good deadline for international accounts is from 3 to 4 months. After that time, you should make a decision to forward delinquent accounts to your attorney or collection agency, no matter what.

Secondly, always monitor your debtors to see how they’re doing. When dealing with international sales, your collection policy should be tighter than your policy for domestic trade. Keeping a close eye on your debtor's business and general situation is key in international sales. There are several warning signs that can tell you when to act faster than the collection policy suggests. By being watchful, you will be in a position to get to the debtor first, before other creditors do. This will increase your chances of collecting. Here are some things to watch for:

Customer asking for clarification or proof of services more frequently
General slowdowns or loss of business in the customer’s industry
Order levels decreasing or empty shelves in the warehouse
Loss of key staff members; large layoffs or reductions in hours
Telephones disconnected or decision makers not taking your calls
NSF checks; no preprinted name or address on the checks

Final recommendations

Establishing an appropriate credit and collection policy and following these suggested guidelines for international sales in Mexico, you position yourself to reduce the risk of uncollectibles. You should also see an improved days sales outstanding (DSO), collection effectiveness index (CEI), and bad debt write-off percentage.

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DISCLAIMER: HMH Legal has provided this material as a free educational message. The information you obtain in this article is not, nor is it intended to be legal advice. HMH Legal will only provide legal advice after having entered into an attorney client relationship. It is imperative that any action you take be done on the advice of counsel, and not based solely upon this article.

ABC-Amega Inc. provides international receivable management and debt collection services for exporters to more than 200 countries including Mexico and all of Latin America and South America. For more information, complete our Information Request form or email info@abc-amega.com.