In our experience, the key areas to focus on include both cultural and operational conditions and in particular.
Local knowledge
Credit insurance
Retention of Title.
Local Knowledge
Knowing and understanding local customs, tradition and culture is a very important part of doing business overseas. In this regard, we would always recommend that you engage with local accounting and legal advisors to ensure compliance with local laws and regulations.
In particular, local advisors are best placed to ensure that you obtain the necessary licenses and permits to operate legally in the new market and also understand and familiarise yourself with the tax requirements, including corporate taxes, and any other local taxes.
Ifac, through its Friel Stafford subsidiary, is part of an international network with 313 associated accounting and legal firms in 1,211 locations in 113 countries and is well-placed to help identify the right professional partner.
You may also need to be flexible and willing to adapt your business practices to align with local custom and practice. In this regard, the hiring of local staff who understand the cultural and business environment and the provision of cultural training to your team to facilitate effective communication and collaboration can prove to be invaluable.
Before expanding into international markets, you should consider:
Have you established strong relationships with local partners, customers, and government authorities?
Have you researched local trade shows, business associations, and networking events to participate in and help build a robust business network.
Have you trained your staff on cultural differences and effective communication techniques.
Have you appointed local accounting and legal experts to advise on local trade regulations, employment laws and tax obligations.
Credit Insurance
This is when a creditor insures their debts with a third party. Credit Insurance is intended primarily to cover commercial sales contracts, but may also be extended to include W-I-P (work in progress) where relevant. It protects domestic and/or export sales against non-payment caused by factors such as insolvency and default.
Why is it used?
Bad debt is unpredictable and potentially the most damaging type of loss a business can encounter. In the event of insolvency of a debtor, Credit Insurance can replace cash flow, hence providing a cushion against the bad debt. It should not be considered as an alternative to non-existent credit management. It is designed to support an existing system of credit management.
How does credit insurance work?
Whether you apply direct to the Insurance Company or through a broker, a number of influences will be considered when deciding the price and extent of coverage to the customer. Such influences are:
Trade Sector
Previous loss record
Standard of internal credit management (collections & credit information taken)
Markets sold to
Customer profile
Economic and political conditions of the market to be covered.
Once calculated, premium is usually charged at a % rate of either insurable turnover. This is often payable in deposits during the policy year and adjusted at year end, or monthly in arrears against a declaration of turnover.
In the event of a bad debt and a claim being made against Credit Insurers the customers may have to bear a proportion of the loss – this is the minimum retention. The discretionary limit the insured can trade up to differs from case to case. In all cases business information is required.
The credit insurer will let them trade up to a certain amount (the discretionary limit), and to back up their decision under that limit they must take approved credit information. Over the discretionary limit they must refer the deal to the credit insurer.
Benefits of Credit Insurance:
Financial Security: Provides a safety net in case of payment defaults or unforeseen events, ensuring your cash flow remains stable.
Increased Confidence: Allows you to extend credit to new customers or enter high-risk markets with greater confidence.
Competitive Advantage: Enhances your credibility and reliability as a trading partner, potentially attracting more business opportunities.
By investing in credit insurance, you can mitigate financial risks and protect your business from the uncertainties of international trade.
In terms of Credit Insurance, when expanding internationally ask yourself:
Have you considered whether you need to obtain credit insurance to protect against the risk of non-payment by foreign customers.
Have you obtained quotes from multiple insurers to compare premium costs and evaluate the overall value of the cover offered
Have you chosen an established insurer and understand the terms, coverage limits, and claims process.
Retention of Title
A retention of title (ROT) clause, put simply, is a clause which prevents ownership of goods which have been sold passing to the customer until the supplier has been paid in full. While such clauses are common in today’s business world, it is surprising how poorly suppliers fail to use them effectively in practice. This article is concerned with how suppliers should use retention of title clauses when a customer goes into liquidation or receivership.
There are three aspects a seller must ensure that his ROT claim will be successful: (a) that he has an effective ROT clause, (b) that the ROT clause has been properly incorporated into contracts with the purchaser, and (c) that he can identify the goods which are the subject of his claim.
The ROT Clause
There are two broad types of ROT clauses: a "simple" clause where the seller retains title in goods delivered until they have been paid for and an "all-monies" clause where the supplier retains title until the price of the goods and any other amount owed by the buyer to the supplier has been paid.
The most effective type of clause is an "all-monies" clause, as he will not need to identify goods which have been supplied against specific unpaid invoices. Such clauses should be drafted by a solicitor.
Incorporation of Clauses into Standard Terms of Trade
For a retention of title clause to be valid it needs to be incorporated into your standard terms of trade. Incorporation is a legal term which, in this context, means that the seller’s terms of trade have been accepted by the buyer. An effective way of doing this would be to have every new customer complete a credit application form which specifically refers to the suppliers terms of trade.
In the period leading up to the purchase both parties may have received copies of each other’s terms. This will lead to a dispute over whose terms of trade prevails, and this dispute is commonly known as the "battle of the forms". As a general rule the party sending the last contractual document prior to delivery of the goods will succeed in incorporating its terms.
Identification
Assuming the supplier has a legally effective ROT clause which has been properly incorporated, the last hurdle which he has to overcome is to show that he can identify the goods which were supplied. This task can be difficult for a supplier of goods to prove that the goods were actually supplied by him, as the buyer may have purchased them from a different supplier. A supplier will not succeed in a claim if the goods in question have been irreversibly incorporated into the finished product or have been used in the production process.
Whether trading nationally or internationally, due consideration should be given to the following questions:
Have you had a legal advisor draft suitable Retention of Title Clauses to ensure these clauses are legally enforceable in the target country’s jurisdiction.
Are these Retention of Title clauses properly incorporated in your terms of trade and have they been accepted by the customer?
Do you maintain thorough documentation of all transactions including signed terms of trade, orders, delivery dockets and receipts.
Can you clearly identify the product of goods you have sold?
Conclusion
Taking a proactive steps to preemptively protect your business when commencing to trade overseas requires a multifaceted approach. The key elements to consider include, implementing effective retention of title clauses, securing trade insurance, and most importantly understanding local culture and regulations.
By taking these steps, you can mitigate risks, ensure compliance, and maintain the financial stability of your business as you expand into new markets. Implementing these strategies not only safeguards your interests but also positions your business for long-term success in the global marketplace.
