Organisations must carefully review and select which companies they do business with, or risk cash flow problems. Companies that do business internationally must understand the payment practices and collection behaviour of customers in the countries they operate in.
There is strong evidence to suggest that, while the tendency to trade on credit is a common practice for domestic and international business-to-business transactions, companies can be exposed to poor payment behaviour due to the volume of their transactions on deferred payments. In a Global Collections Review, Atradius interviewed more than 6,400 companies across 30 countries, including 200 respondents from Australia.
The report revealed most companies focused on export in Asia Pacific (APAC) are concerned about the complexity of payment procedures, which is the main reason for delay, as opposed to the payment behaviour of their buyers.
Collecting overdue invoices is an important element of a credit management strategy, especially to avoid unnecessary pressure on cash flow.
One measure that companies can take to protect their cash flow is evaluating payment terms and enforcing payment discipline with a strong collection system, looking not only at the ‘over 90 days’ overdue receivables but also at ‘between 30 and 60 days’ overdue receivables.
According to the survey, companies try to recover unpaid commercial debts mainly using internal resources as well as partners such as debt collection agencies and law offices, for improved handling of overdue receivables. Cooperation with debt collection agencies is more common among businesses in the Americas and APAC, where around 40% of the companies chose external collections.
In general, the outcome of a debt recovery action depends on the age of the debts that are being collected. The survey highlights the strong tendency for companies in APAC to submit mainly debts not older than 60 days to debt collection agencies.
In APAC and the Americas, companies appear to be more aggressive than European companies in trying to recover their money, and are willing to use a number of methods to achieve results.
APAC companies were willing to use internal resources to deal with delays (61.5%), and were also willing to initiate legal action against their non-paying buyers (41.5%) and cooperate with debt collection agencies (38.9%). It is also common for companies to sell their debts (14.4%).
When weighing up using an internal approach versus an external approach, companies need to consider how much money they spend daily to run the business and on staff salaries, and time they spend on chasing payments, plus any additional costs to recover debt, such as postal costs for overdue reminders.
Companies in APAC expect debt collection agencies to visit their buyers more frequently, especially because delayed payments are more likely a result of the buyer’s intentional use of the outstanding invoices as a form of self-financing.
In general, companies in Europe appear to be more cautious of using services other than traditional debt collection. Companies in the Americas and APAC show a stronger openness towards service innovation.
Compared to European countries, where acceptance of final demand letters is quite high, companies in the Americas and APAC have shown a greater openness to adopting additional solutions to put pressure on their debtors before starting the traditional debt collection process. More than 60% of respondents in both regions claimed to be willing to adopt this practice within the next two years.
Invoice checking is a service provided by debt collection agencies to confirm that business transactions/invoices to debtors are indeed accurate and due. APAC companies report that invoice checking offers opportunities to recover outstanding receivables more easily, with 57.5% of respondents (highly) likely to adopt this service in the next two years.
Ultimately, the key aim for businesses is to manage creditors to maximise positive cash flow, regardless of what methods are used. Businesses should do due diligence before setting up lines of credit for organisations to ensure they can and will pay on time. Businesses should also consider trade credit insurance, which can protect the business when customers don’t pay.
It is very interesting to know the collection model and practice in the Americas and APAC, however, I suggest to mention the collection model and practice in MENA. These markets are huge for debt collection practice in general and particularly in the GCC country, the absence of good debt collection agencies in the region led to high volume in recovery.