How to Properly Assess the Risks of Extending International Credit

We are now living in the era of the connection economy. With every year that passes, the Internet makes it easier and easier for small companies to do business on a global scale.

Opening up the entire world as a potential customer is an extremely attractive proposition for many businesses, but there are also significant risks that this can create for businesses that extend credit terms to their customers.

Any time you are extending credit to customers, there is going to be a certain amount of risk involved, but when you introduce an international element into the equation, the risks become exponentially more complicated.

In order to gain a full understanding of the risks you might be exposing your company to, let’s look into some basic topics you should explore and evaluate any time you are considering extending credit to international customers.

Country Risk

While it is not fair to make any type of final credit decision based on the track record of an entire country, you can still use any general information about a country’s overall track record to gauge the risk of dealing with a customer or client in that country.

In order to fully understand the risk you should associate with a particular country, you will want to look into how good of a job that country does at assisting with international debt collection attempts.

Many foreign countries will be more than happy to help you collect legal and accurate debts that their citizens owe. However, other countries will make it very difficult to collect any outstanding debts simply because they can.

Credit Reporting Practices

One of the most common ways to check into a domestic customer’s background before extending credit is to pull their credit report. In many cases, this can be done internationally as well, but you will want to have a solid understanding of how accurate the credit reporting is in that particular country.

If outstanding debts are not being reported correctly, there is a chance that a customer could look much more credit-worthy on paper than they actually are. Lender beware!

Differences in Culture

Another aspect of doing business internationally that you are going to want to think about is the differences in culture that you will be force to deal with.

The biggest difference you might encounter is that foreign customers will likely not speak the same language as you. This can be no big deal when things go smoothly, but if there is a problem it can add an extra layer of difficulty to the situation.

You will also want to gain an understanding of other cultural differences like work schedules and proper ways to show respect.

Local Collection Laws

Before you extend credit to any customers, foreign or domestic, you should have a solid understanding of the debt collection laws that govern their location.

In order to get a realistic understanding of how these laws might affect your agreement, you might want to consult with a commercial debt recovery agency before you actually offer credit to the customer.

Knowing Your Contact

Regardless of where you are doing business, it is always a good idea to get to know your customers. This can be even more powerful when those customers are located in another country.

The more you get to know your customers before extending credit to them, the better you will understand the risks you are taking with respect to them making regular payments.

While the idea of conducting business on a global scale is very modern and exciting, it can also be filled with dangerous risks that are simply not worth taking. Before extending credit to any international customers, you absolutely must do your detailed homework to decide if it is truly worth that risk.

By | 2017-05-10T13:22:10+00:00 April 13th, 2015|Blog|0 Comments

About the Author:

Graduated from University of Utah - business degree 1990. Served in US Army as an interrogator / linguist, then as a tactical intelligence officer - Military Intelligence 1986-1990. Managed Western US sales operations for NY based collection agency 1990-1992. Founded Direct Recovery Associates, Inc. 1992-present