9 Nov 2016
Receivable Management in ASEAN Markets
As the Belt and Road Initiative unfolds, businesses generally agree that they must follow its development and the opportunities that emerge. An earlier survey by HKTDC on manufacturing enterprises in the Pearl River Delta region indicated that 66% of the respondents would consider tapping business opportunities in countries along the Belt and Road, especially the ASEAN markets, in the next one to three years. Receivable Management Services (HK), or RMS, which has been in the receivable management business in Hong Kong for 35 years, recorded a significant increase in risk enquiry and collection consignment in ASEAN markets from international clients in the past year, with Cambodia, Myanmar and Laos registering staggering three-digit increases. This reflects the growing interest of businesses to open up the ASEAN emerging markets, but it also underscores the risks of bad debt. In order not to forego the chance of opening up the ASEAN markets because of the entailing risks, a company must properly carry out risk management and draw up business contracts in the light of the credibility of different companies.
In an interview with Pansy Yau, HKTDC Deputy Director of Research, Deborah Ho, Managing Director of RMS, and Norris Chan, Vice President for Business Development, share tips on how to do a good job of bad debt management and matters that merit special attention in opening up the ASEAN markets.
Yau: How do you assess the bad debt risks of a new client?
Ho: There are several reasons why a client chooses to defer payments. This may be due to poor management or financial difficulties. Another possible reason for deliberately deferring payment is to take suppliers as a source of free fund raising. Repayment may also be affected by economic cycles. Deferment may be no more than a habitual trick to seek discounts in payment so as to reduce cost.
For this reason, a company must find out some important facts about its counterparty, such as its background and financial situation, before doing business with it. There are many companies that can provide basic company search service, but as an international receivable management company, we would advise our clients to pay attention to the size of this company, its past experience and who its shareholders and upstream and downstream clients are. What is most important is to know whether or not this company is having legal disputes or records of not making payments on time with other people or companies, or had such records in the past.
Yau: Through which channels can we find out about such information?
Chan: Company data, including records of legal proceedings, are available to the public in some countries and regions, such as Hong Kong. However, in some regions, such as some ASEAN countries, this kind of information is not available to the public and can only be obtained through local law firms. If a company had never been sued, the only way to find out whether the company and its shareholders and office-bearers have bad records of being chased for overdue receivables is through large multinational receivable management companies. Compared with local receivable management firms that only have records of local companies being chased for overdue receivables, multinational companies can provide records of overdue receivables in countries around the world. After obtaining the information, we can sort out and analyse the facts and build up our credibility archive and risk monitoring system, and carry out receivable management when signals of bad debt risks occur.
Yau: What is receivable management? How should we establish a risk monitoring system to reduce bad debts?
Ho: In Europe, North America and other developed economies, companies would generally take receivable management measures at the end of the 30-day accounts receivable collection period by starting their own debt collection procedures or commissioning the task to receivable management companies. They may need to resort to legal consultancy and insolvency services at the critical stage. In China or the Southeast Asian countries, companies would not normally begin collection procedures until half a year or 3-4 months after the accounts receivable is overdue, which increases the difficulty of collection and the chances of bad debt. Many big companies would outsource these jobs to receivable management companies because the latter have a large database and can effectively grasp and analyse the repayment capability of debtors. Familiarity with the legal culture of the place where the accounts receivable occurs makes it possible for them to choose the most effective arrangements to pursue debts or negotiate with the debtors, narrow the differences between the two sides and pressurise the debtors into making repayment. Some people may have a bad impression of “debt collection companies”, but normal receivable management companies, that is, companies approved by the government for this purpose, would not begin by making phone calls to demand repayment. Rather, they would try to understand the reasons for the deferment of payment by downloading the financial information of the debtors from their own database for analysis before deciding on the appropriate collection tactics the way lawyers handle such matters.
Chan: In the early stage, accounts receivables may be dealt with according to normal accounting methods, but since cash receipts from receivables may decrease with time, it is necessary to take receivable management measures when noteworthy signals of danger occur, such as slow repayment, breach of promise to pay, financial consolidation, change in banking details, selling at abnormally low prices or a sudden and unexplainable increase in purchase orders. If a company prefers to handle debt collection matters itself, it must draw up the necessary credit policies and procedures, train staff members in the handling of receivables, recognise the situation in the place where the accounts receivables occur, check the repayment capability of its clients, and suspend trading when problems arise.
Companies must be mindful of the fact that legal action must ultimately be taken when debt collection measures proved of no avail. The laws and the limitation periods for legal actions differ from one ASEAN country to another and there is no way to take action after the limitation periods. I have seen many clients losing their cases due to a lack of understanding of the relevant laws.
Yau: How should we go about choosing our receivable management company and what are the charges?
Ho: We can find many receivable management companies or agencies online, but their service standards can vary greatly. Some collection companies of poor standards may resort to undesirable practices to pursue payment. There are even cases where collection companies closed down after pocketing the money collected. In order to avoid these troubles, care should be taken to select companies with a long history, good size (number of workers), good track record, management experience, international networks and word-of-mouth, because a company’s database is built upon years of practical experience, and manpower is needed to handle huge amounts of data and documents. Other objective references include whether a receivable management company has many big clients, the duration of its relationships with clients, and whether it is regularly invited to speak at reputable open forums.
Charges depend on how complicated the cases are. Generally speaking, the older the debts, that is, the longer they are overdue, the higher the charges. Charges are calculated as a percentage of successful collection.
Yau: What are the risks we should watch out for when opening up ASEAN markets? Do you have any special collection tactics and management suggestions to offer?
Chan: Generally speaking, prudent collection tactics and management should include the following:
- Regularly review the records of legal proceedings of one’s trading partners;
- Regularly review the presence or otherwise of bad records of debt collection on the part of the trading partner and its shareholders or office-bearers;
- Regularly review whether or not the trading partner has frequent changes in its shareholder structure;
- Regularly review the credibility of the trading partner in the business;
- Strengthen the day-to-day management of receivables;
- Shorten the debt collection period;
- Resolve arguments/disputes as quickly as possible;
- Closely monitor the account receivable turnover days;
- Strengthen and improve the receivable management policy according to the market climate.
As far as ASEAN markets are concerned, companies should take special note of the fact that it may be difficult to obtain basic information such as company background in some emerging markets, such as Cambodia, Myanmar and Laos. Even in Vietnam, it is not until recently that company search service becomes available, and whether the information obtained is complete and accurate remains to be proven. Companies can only check the background and financial information of their clients through lawyers or credit rating agencies. The 10 ASEAN countries all have their own laws. Companies must find out about the limitation periods of different countries and the documents and procedures required to file legal proceedings.
Individual ASEAN countries are more susceptible to political interference and some investment projects in these countries may be overturned or delayed due to changes in the political climate.