It is no secret that over the past few years, the global economy has undergone a slowdown causing a shrinking demand for China exports. It is also no secret that overcapacity problems in China and exporters from other countries competing directly with China exporters are top-line concerns for China exporters. China manufacturers have seen their competition increase while export sales and profits shrink.
Another top-line problem that is not frequently discussed openly, but is discussed in quiet, concerned whispers among China exporters is the value of the exporter’s uncollected overseas receivables has grown dramatically, and is only increasing. The reality is that exporters are facing a minimum 5% bad-debt-to-sales ratio. When faced with increased costs and shrinking profits, continuously absorbing a loss of 5% is unsustainable.
To improve their competitive edge, China exporters must upgrade business management practices to remain viable in the marketplace. The old days of exporters making big profits by simply selling at the lowest price are gone. Too many new financial pressures are combining causing profit margins for the exporters to shrink or forcing them to go out of business.
One fundamental upgrade to business management practices that exporters should apply is their risk management strategies when selling into overseas markets. Sales by using OA terms is an area where China exporters are deeply lacking expertise and understanding. Business conducted in overseas markets using OA terms is not a business discipline that exporters are familiar with. As a result exporters are exposed to huge risks and face challenges with collection of their overseas debts.
Much of that debt is the offspring of the current cash flow crunch born of tight credit and reduced demand in the overseas markets. Some is the result of deliberate attempts by overseas customers to fraudulently obtain products without paying. Regardless of their intent, there are a number of recognizable debtor actions that indicate an overseas customer is seeking to delay or avoid payment.
This month I’ll share with you some of the Deadly Games that Debtors Play. These games are commonplace occurrences that we hear every day from our clients and, like the previous Myths and Realities shared with you, are real-world situations. So let’s look at some of the more commonplace “Deadly Games Debtors Play”:
Debtor Game #1: Partial Payment Without Seller Agreement
Partial payment without seller agreement is a typical technique debtors often attempt. The buyer simply will make a partial payment and then behave as if that is all they are going to pay in spite of the original agreed price. They assume the China exporter will give up and simply accept this as the debtor’s payment for the merchandise.
This is also a technique that is used by a crafty overseas buyer to re-negotiate for a lower price long after the order was placed and the shipment has arrived. The China exporter is in a bad situation because the buyer has the goods and the exporter - most likely - does not have a contract to protect themselves from this situation that is enforceable in the buyer’s market. So the exporter is now stuck in a bad situation and usually is at the mercy of the buyer.
Debtor Game #2: Lost Major Customer / Awaiting Customer Payment
Another frequently used technique to avoid or postpone payment is where the buyer claims that they lost a major customer and thus cannot afford to pay. A common variant on this same technique is for the debtor to claim inability to pay until their customer pays for the merchandise.