China exporters face increasing overseas debt collection challenges. Part 1 of a multi-part series

Dennis Wagaman

China exporters face increasing overseas debt collection challenges. Part 1 of a multi-part series

Much is written about China’s export juggernaut, but little is said about the staggering delinquent accounts receivable due its exporters from overseas customers, estimated by the China Ministry of Commerce at over US$100 billion and growing at US$17 billion annually.

Chinese exporters currently are running bad-debt-to-sales ratios ranging from 5% to 30%. By comparison, US companies average a 1% ratio.

The art and science of overseas accounts receivable is a complex topic. This discussion focuses on a shortlist of key warning signs that indicate a buyer may be planning to forgo payment. These warning signs include:

payment already 90+ or 120+ days past due
breaks payment promises
ignores payment demands
asks for renegotiated payment terms
makes only partial payments without seller approval
claims they do not have money to pay
claims they cannot pay until they are paid by their customer
threatens bankruptcy if payment demanded
avoids contact, does not return calls or e-mails
requests patience due to new investors
claims payment will be forthcoming once their company is sold
buying from exporter competitors without paying existing debts
seeks to return merchandise long after delivery has been made
falsely claims defective merchandise was received

If an exporter experiences any of these warning signs, there is a high likelihood the customer is no longer a customer, but has transitioned to debtor status. Unless the exporter takes targeted actions to proactively seek payment, the debt likely never will be recovered.

Patience often is an underrated virtue in many facets of our professional lives. However when it comes to accounts receivables, time is the enemy. The longer an exporter waits to action collection efforts, the less likely payment will ever be received.

Knowing the warning signs of bad debt is no guarantee of avoiding their crippling affect upon a business. Ignoring those warning signs, however, is a sure-fire recipe for lost revenue and possible business failure.

In summary: A sale is never complete until it the invoice is paid.

posted about 2 years ago

Theodore Zhou		yes.most of chinese factories are small and have little knowledge about credit research for the potential buyers.usually they will consider it by the country where the buyer shows. also they have not much knowledge about LC( letter of credit). sometimes,they can be cheated by LC also.some banks in some countries will help bad credit in LC cheating.they will refuse payment for the shipper and release the documents to the buyer. many times we can't tell. and once such things happen,it's a tragedy for the manufacturer. the big competition from all sides forced them to offer very low profits. so most small manufacturers will only accpet TT advance to secure. posted about 1 year ago

Marcel Wiedenbrugge		''A lot of things can be said about do's and don't in collections, accounts receivable or credit management. In my life I came across many people (customers, colleagues), excuses, issues, problems and solutions. If I look at the big picture, I conclude that in the long run effective collections are based on seven components: 1) relationships 2) communication 3) collaboration 4) trust 5) performance 6) consistency 7) flexibility These components cannot be seen separately: they are strongly intertwined. Besides, these seven factors do not only apply externally (customers, stakeholders / suppliers), but also internally (your colleagues - from several departments - and systems / procedures used within the company). I deliberately mentioned consistency and flexibility. In a good (collections / AR) system you can (and have to) practice consistency in a flexible way which is an absolute requirement for sustainable results since people, markets and organizations are subject to change. In the end it all boils down to managing and optimizing (potentially) profitable customer relationships on a two way basis. Doing successful business is not a one way street, but implies sound partnerships with all parties involved in the business process. Once you incorporate such a way of thinking and acting into your daily operations, you end up with a strong business model that benefits all and significantly contributes to business continuity. Related to foreign collections for Chinese exporters. As a consultant in (integrated) credit management I did read about this topic too. However, if Chinese exporters would sell to European customers on open terms, it is relatively easy to check on things like creditworthiness, payment behavior, etc. Besides there are many cross border collection agencies take could provide effective local assistance. However, if you sold to companies who where not creditworthy in the first place, this obviously will lead to problems in the collection process. posted about 2 years ago

Dennis Wagaman		You are correct; it is a high number. This information was published by the Ministry of Commerce and is a bit dated. However based upon my experiences with our clients, it is relatively close. This problem is typically associated with the SME’s of China rather than the top-tier exporters who do receive payment via Letter of Credit or have their transactions secured using other channels / methods. More SME exporters in China are now selling on open credit terms rather than the traditional Letters of Credit. This major paradigm shift is due to a number of converging factors that have created increased competitive pressures on China’s exporters. China’s exporters are facing increased competition from within due to overcapacity as well as aggressive competitors from other countries anxious to compete directly with China. One method of competing is by extending traditional open credit terms to the importer customers throughout the world rather than payment via Letters of Credit. This new practice in China of extending credit terms has created challenges the exporters have not previously experienced. They have not been educated about evaluating the credit worthiness of a new potential customer and are not equipped to apply and manage the required disciplines to mitigate this risk and effectively manage receivables. Additionally they are not familiar with the cultural and legal differences in overseas markets affecting this business practice. posted about 2 years ago

Tim Johnson		Oh, right. Thank you for the info, Dennis. 5 to 30% bad debt to sales sounds really high for Chinese exporters. What's the explanation for it? Don't these exporters usually better-protect themselves from non-payment? posted about 2 years ago

Dennis Wagaman		Thanks Tim. Good observations regarding behavior when faced with a bad debt. It is quite an eye-opening experience, however, when one calculates the amount of gross sales necessary relative to the profit margin that a manufacturer must sell, and actually get paid for, just to break even when receivables are not paid. I must add that, unfortunately, there is a bit of confusion here: SCJ's assists China exporters collect money owed to them by their delinquent overseas importer customers located outside of China. We do not collect money from debtor companies located within China. Collecting money from businesses within China, by law, must be done by a law firm. Hope this helps ... posted about 2 years ago

Tim Johnson		Interesting and often-ignored topic, Dennis. I know plenty of traders that just eat the loss from a bad China transaction, chalk it up to experience, and move on. I think part of the reason is psychological: Business people are by nature optimists and are often anxious to put bad deals behind them. Would love to hear about methods and options for collecting debt in China. posted about 2 years ago

China exporters face increasing overseas debt collection challenges. Part 1 of a multi-part series

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