How to deal with payment defaults in exports?

Challenges and restraints have always surrounded international trade yet global growth, owing to the exchange of goods and services over borders, has been dynamically significant over the years. The proactive approach, adopted towards globalization and international trade, by the emerging market economies has been the reason why outcomes have been this positive and promising.

Exports and payment defaults

There has been a consistent growth of exporters in the Indian subcontinent, over the years. The benefits exporters derive outweigh the difficult tasks that are required to be handled by them.

Even though there are systematic payment methods to safeguard the interests of the exporters, owing to a lack of trust between the international traders, default in payments may pose a serious challenge for the exporter.

An export procedure beginning with the registration of export business ends when the goods are delivered to the importer, procuring payment in return. During this process, an exporter may face careless or unforeseen and unavoidable challenges. To overcome these hurdles, an exporter has to be resilient and well prepared.

The approach exporters can take to avert payment defaults

Whereas the most worrisome feature of international trade for importers is the procurement of high-quality goods at competitive prices, for exporters it is the timely payment by the importer after they have dispatched the goods.

How much an exporter can safeguard his payments is directly correlated to the type of approach he takes as his business strategy. An exporter can adopt a reactive or a proactive business approach, or a blend of both strategies to deal with the risk in payments. Thus, either the exporter can wait for the importer to default in making payments and then take measures to deal with it or can take precautionary measures beforehand to safeguard his payments. Of course, taking proactive measures tends to minimize the chances of having to take recourse of reactive measures at a later date.

Proactive approach

A proactive strategy is always more effective to meet the challenges of payment default because they involve prior preparation and take into account all possible challenges.

Exporters have to be very careful while agreeing on several aspects. It includes a method of payment, the terms, and conditions in the contract, ensuring their bills of exchange or documents. Also, exporters must keep in mind the countries that have a high default rate in payments.

A. Payment method

It is crucial for an exporter to agree to the payment method that is either completely safe or holds minimum risk. Given below are some methods through which exporters receive payments in international trading.

Clean payments
Under this payment system, the transfer of related documents is direct between the importer and the exporter and the bank is only involved in clearing the amount. Clean payments can be as an advance payment by the importer or as an open account in which the payment is given by the importer only after he receives the goods.

Documentary collections

Under this payment system, the banks hold the concerned documents to be released to the importer only when they clear the payments. It may be against payment D/P or acceptance D/A, i.e., against acceptance of a draft.

Letter of credit

Under an L/C, the importer assures the exporter, through a legal negotiable instrument, that he shall receive payment after completing his end of the agreement, by the importer’s bank.

The exporter can also use the letter of credit as a form of export credit. To improve his cash flow or to meet any unavoidable expenditure, the exporter can present the letter of credit to a bank for it serves as collateral and takes a credit against it.

B. Drawing the contract

To overrule any potential confusion between the exporter and the importer and to help resolve any difference, it is essential to draw a written contract between the two rather than just a verbal agreement.

While framing an agreement or a contract, many facets require coverage to eliminate the risk factors associated with exporting. The contract should be clear about what and when also enclosing the responsibility for both the parties.

Included in the contract must be the goods and the quality compliance they have to meet. The details regarding the price such as the amount, the currency and the exchange rate, terms & conditions regarding the payment. It should include when and how, delivery terms, shipping costs, custom related conditions, and insurance details covering the party to bear the risks and the type of risks to be borne by each party at every stage.

Besides this, the contract should include the procedures to settle disputes in case of any defaults made by the parties and the place where legal proceedings shall be conducted in case of a legal dispute.

C. Credit insurance

In International trade, it is always easier to avoid the risk factor before it has occurred. To safeguard their payments, even if the importer defaults in making a payment, it is essential that an exporter ensure the potential risk of non-payment by the importer by export credit insurance (ECI).

ECI is a kind of conditional assurance to the exporter. In case an importer fails to make the payment arising out of any political or commercial fluctuation, the exporter shall receive his payments.

D. Norms of the importing country

Each country has a different set of laws and regulations that govern its functioning. It is essential for an exporter to understand and gain knowledge about the importing country. The exporter should formulate a written contract accordingly and well substitute any contingent law of the importing country.

Reactive approach

The foremost step of an exporter should be to communicate and negotiate with the importer. The exporter should look for good terms and convince him to make the payment. When communicating with the importer, the exporter should be willing to compromise on a few unreasonable demands of the importer. Also, if the need arises, as it would save the exporter from incurring substantial losses from non-payment.

If however negotiating with the importer fails and the sum is large, the exporter could obtain assistance from several sources. It could be of its bank, qualified trade experts, trade commissions, recovering agencies or legal counsel.

A. Recover from insurance policies

To mitigate the risk of non-payment, the exporters can opt for account receivable insurance policy to be used in case of default in payment by the importer. The insurers, under the ARI policy, pay the exporter if the importer does not pay owing to fraudulent intention.

One such central government undertaking body in India is the Export Credit Guarantee Corporation. It ensures credit guarantee to the exporter against any possible default of payments by the importer. ECGC is more or less operates as an insurance agency. It guarantees payment to the exporter if the importer defaults in making a payment.

After both the parties have signed the agreement, the exporter approaches the ECGC. It is to get an approval and amount of limit. If the importer fails to make the payment, ECGC reimburses that amount to the exporter. Also, its operational network tries to find the cause of default. If the ECGC deems fit, they blacklist the buyer who makes it difficult for him to continue business. It is because it affects his creditworthiness in the market.

B. Protection with ‘without recourse finance’
When an exporter is unfamiliar with their buyer’s bank or is involved in trading with a country where political risks are considerable, then they can opt for without recourse finance. This protects the exporter from default payments against L/C.

C. Legal channels

Certain countries have stringent laws. It may be difficult for an exporter to recover the lost amount from the importer belonging to such countries. It is essential for an exporter to sign a contract with the importer of such countries. Sometimes it is also better if the exporter builds a strong local network in that country. It helps them recover their amount from the importer.

The exporter can approach their embassy, Foreign Chamber of Commerce etc. and seek their intervention if the importer refuses payment. The exporter must present documentary proof in the form of a contract to the legal advisor. But, the exporter should seek assistance from these legal channels only when the amount is considerable or high.

There is a multitude of international agencies that extend their collection services against fees to the exporters against any possible default by the importer. Since the legal costs of processing such cases are high, collection procedures often recover very little of the outstanding amount.

If both the exporter and the importer agree, then they can take their dispute to an arbitration agency. It is better than the exporter taking legal action against the importer. The settlement of dispute via an arbitration agency will be quicker. It will be less costly than legal action, which could take too much time.
The International Chamber of Commerce does not belong to any single country and is therefore acceptable to all international traders. It handles major international arbitration.

An Endnote
Receiving timely and proper payment from the importer is the most critical aspect of the deal for an exporter. It is essential that an exporter treads and plans about this criteria delicately and meticulously. There are specific measures, which an exporter can take in advance. They can contact certain agencies or trade commissions after the importer has made a default in payment for due action and reimbursement of the amount through legal intervention.