Making Sure You Get Paid, Protecting What’s Yours
Don’t get so excited when you make a sale or
place an order at a great price that you forget
to look after your business’s interests.
YES, BELIEVE IT OR NOT, getting paid is a common problem in international business, especially between two businesses located in different countries which do not jointly recognize a single, overarching regulatory body (something you can avoid within the European Union, for example). And yet there are opportunities to be had that can make you want to take the risk. The same goes for finding a terrific price offered by a new vendor. You can pay for mistakes in multiples of the price savings you thought you would gain.
Risky business?
Suppose you want to start doing business in an emerging market. You may soon discover that there are no uniform or standardized processes in that country, and there’s a complete lack of government infrastructure and financial regulation. If you still want to pursue the opportunity, you would be wise to protect your company’s interest via receiving payment in advance, or using third party banking and escrow services.
However, it’s not always so difficult. Most deals between businesses that cross countries’ boundaries are either regulated by an organization such as the EU, trade treaties such as the North American Free Trade Agreement (NAFTA) or other governmental structures that allow for cooperative enforcement of fair trade practices, contract law, business law, etc. These types of helpful organizations tend to be available with developed countries and also those that are focused on capitalism and economic growth.
Just remember, not unlike any other types of investments, the most secure opportunities with the least risk will often yield the least reward. As the cliché goes, and as every entrepreneur learns one way or another, risk and reward are directly related.
Insuring invoices and factoring
Two kinds of for-profit financial services can help you ensure you get money due you. First, you can insure your invoices to qualified customers (whose stability is measured by the service offering this protection after looking at their financial records). That way you know that you’ll receive at least a decent percentage of any defaulted payment. Or you can set up a factoring agreement, where the factoring company collects your payments due and retains a commission for chasing the money down. These services obviously reduce your bottom line, but it may be a question of getting something or nothing in extreme cases. And by the way, these services may be helpful to your cash flow even if you only do domestic business. In remote or developing countries, you may not be able to find this kind of coverage.
It’s not only about getting paid
Getting paid—or not—is highly visible. But let’s not forget that your other assets, like materials, equipment and such, are like cash on your balance sheet. It’s important to look after them in your international business ventures as well.
One time we started working with a factory in another country that was recommended to us by a contact. She reported they had reliably delivered for years. So we naïvely went into the deal with a little bit more trust than we probably should have had. Don’t get me wrong: We still used our boilerplate agreements and went through all of our usual steps. But we never really investigated how well this factory was doing financially. (Often vendors won’t give you a peek into their books, but you can always get special types of insurance coverage and make other arrangements that either guarantee an outcome or at least mitigate a lot of the risk.)
So Scott and I invested quite a bit of money in raw materials and tooling to get ready for a large-scale production run. What we didn’t know was that the factory was barely staying open. We trustingly purchased raw materials on a pass-through deal that put them into the factory’s inventory. The company could now list our tooling set-up as if it were there own. They promptly shut down operations for good and went into liquidation—with our stuff on their factory floor, halfway around the world.
As you can imagine, when local creditors began the process of salvaging what they could from the vendor’s facilities and warehouses, our investment was… let’s say it was lost forever. We tried to contact various people and governmental agencies that we believed would be in control of certain aspects of the liquidation. However, that proved to be an exercise in futility. In the end, we just had to cut our losses and move on.
The moral of the story is simple: You need to make sure that you have a way of accounting for and protecting your assets. Whether they are cash, inventory, raw materials, finished goods, etc., it doesn’t matter. You need to be sure that you have a clear and concise way of recovering what is yours or what is owed to you.
If you are providing materials or selling goods (and this tip goes for domestic as well as sales abroad), it’s smart to have a clause printed in your invoice’s terms of payment that says the goods in question remain your property until they have been fully paid for. It won’t always protect you in dire situations, but it is important documentation about who owns what in case of your customer’s or vendor’s bankruptcy or liquidation.
Other resources
Another great way to ensure that you will get paid as agreed and on time is to work closely with local resources such as banks and law firms. Also consider trading companies that specialize in connecting international business relationships for different reasons, usually for a percentage fee of the total revenue of the business being done. I have often used resources like these over the years, not only because it eliminates or at least mitigates a lot of the risk, but also it takes a ton of work and worry off of my shoulders, allowing me to focus on other parts of my operation.
If you don’t go that route, it’s very easy to get bogged down by all of the minutiae and petty details that by the end of a day, week and even month leave you asking yourself what you actually got done, and where all the time went. It’s just like working with a resource at home, whether it’s a tax preparer or bookkeeper who charges a percent or two, or a realtor who charges five or six per cent to handle everything on your behalf and to ensure the highest and best outcome on property deals. I’m a big fan of people that have a fiduciary responsibility to either my business or me.
It’s not all grim news
In short, there are many ways to get paid and protect your assets. You may have to have your customers pre-pay (and if you’re just starting up your business, or starting out with a new vendor, you’ll know that can apply to you as well, until you establish a track record). Other times you may request that money be put into an escrow account or be used to purchase bonds that can be held as collateral on a deal until everything is complete and payment is due. Some complex deals require working with trading companies or other professional entities that have the ability to enforce contracts and agreements within a country, due to their business structures and their understanding of local regulations and processes. In any case, there is always more than one way to skin a financial cat. You just need to evaluate your situation and make choices that work for you and your organization.
M.O.