Debt Negotiations in Global Trade

Collecting outstanding debt in international trade is seldomly played by the rules of regular debt collection. 

Deals in international trade are generally closed across multiple jurisdictions. Because of the complexity of legal systems, and the substantial costs involved in enforcing payment through (cross border) legal proceedings, debt collection for claims in international trade often comes down to amicable settlement negotiations^[1]. 

This is further empowered if the mutual benefits and interest of the commercial relationship between creditor and debtor are so high, that business would be seriously hit if the relationship was damaged by escalation of a business conflict or worse, termination of the relationship.

In this article we discuss how you can effectively engage in debt negotiations in international trade.

Proper case preparation for the debt negotiations

First of all, you need to be familiar with the case. Do your fact-checking and get an understanding of the context behind the outstanding debt. What is the status of the commercial relationship with the debtor? What is your position as creditor? Who is the debtor and what is the socio-economic, political, and legal context of the region they are based out of? Which are the reasons that the debtor has defaultedon payment? Does the debtor have financial problems, or is there a dispute about rendered services or delivered goods? Are sudden currency fluctuations an issue? Which interests are at stake? ^[2]

Showing empathy for the counterpart

Secondly, it is important to connect with the debtor. Showing empathy is crucial in negotiations. Empathy can be defined as “the ability to sense other people’s emotions, coupled with the ability to imagine what someone else might be thinking or feeling”^[3]. According to the Harvard Law School Program on Negotiation, it is important to establish a relationship of trust to be successful in negotiations. Trust is built by listening and acknowledging^[4].

Chriss Voss says that “the beauty of empathy is that it does not demand that you agree with the other person’s ideas, but by acknowledging the other person’s situation, you immediately convey that you are listening”^[5], which is key in leveling with your counterpart and obtaining potentially crucial information that you can use during the negotiation process.

In my view, showing empathy gets an extra dimension in international trade, given the presumable differences in culture and location of creditor and debtor.

Determine your leverage for the debt negotiations

Thirdly, determine the leverage you have. Leverage may be defined as “the ability to influence situations or people so that you can control what happens”^[6].

According to Voss^[7], leverage is the ability to inflict loss and withhold pain: where does your counterpart want to gain and what do they fear to lose? Voss further describes three types of leverage, all of which can be used during a negotiation process: (1) positive leverage: being able to give the other person something he or she wants; (2) negative leverage: the ability to inflict loss or pain on the other party; (2) normative leverage, which is about influencing someone through their personal beliefs or rules, which may for our purposes in international trade include business or company culture, cultural, regional and even religious values, economic vision, commercial position, and reputation.

Set targets you want to achieve

With all the information gathered during your fact-checking and with your leverage defined, it is important to set your targets for the negotiations and stick to them. The target may be full payment of the outstanding balance, but more often, a more realistic target may be to collect part of the outstanding claim, within a certain range – for example, the aim to collect between 60% and 80% of the outstanding amount. Another target may be about how fast this amount should be collected: will it be immediate payment, or under a monthly payment plan? Targets may also include alternative solutions, like return of goods, or compensation in the form of services.

Establish a negotiation strategy

To achieve your targets, you must elaborate a strategy for your negotiation. The strategy may change from case to case, but including the fact-checking, establishing an empathy-based relationship, defining your leverage and how and when to you use it, and setting concrete targets, and how and when to go for your goal, should be part of the strategy. Furthermore, some recommended best practices based on Grant and Galinsky^[8] include making the first settlement offer to the debtor (rather than inviting your counterpart to do so), play the game of counter offers (as this satisfies both parties), also giving the debtor the feeling that they closed a good deal. But do not counter too low and importantly, stay within your targets.

Finally, find out how the decision-making process within the debtor’s organization works, and make sure that the right people – the decision-makers – sign off on a settlement agreement once reached.

Assess the results of the debt negotiations

To learn for the future and improve your negotiations skills, assess the results after the negotiation process has ended. Did you have your facts right? Were you able to create empathy with your counterpart, the debtor? Could you establish and successfully apply your leverage? And did you achieve your targets?

Solving claims of outstanding debt in international trade is all about negotiating the best possible deal; whereby fact-checking, establishing a relationship with the debtor through empathy, defining your leverage, setting targets, sticking to a strategy and assessment of results, are key. 

If you want to know more about debt negotiations in international trade, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

David Zannoni

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^[1] https://cobroamericas.wordpress.com/2019/06/09/b2b-debtcollection-latam-settlement/

^[2] https://cobroamericas.wordpress.com/2018/01/29/settlement-negotiations-latin-america/

^[3] https://greatergood.berkeley.edu/topic/empathy/definition

^[4] https://www.pon.harvard.edu/daily/dealmaking-daily/dealmaking-negotiations-how-to-build-trust-at-the-bargaining-table/

^[5] Never Split The Difference, Chris Voss, 2016, page 72

^[6] https://www.collinsdictionary.com/dictionary/english/leverage

^[7] Never Split The Difference, Chris Voss, 2016, page 220 – 224

^[8] https://www.forbes.com/sites/work-in-progress/2013/12/05/six-surprising-negotiation-tactics-that-get-you-the-best-deal/?sh=4c55935c5976

The Debt Negotiator in International Business

Collecting debts in international business can be a complicated matter. Multiple jurisdictions, service or product related issues, and economic and political matters can be a role. 

Often, the collector finds him or herself in a position where it is needed to negotiate payment, a payment plan, a settlement arrangement, or a combination.

Here are a couple of elements that the debt negotiator should keep in mind, when negotiating payment of debt in international business.

File Assessment prior to Debt Negotiations

Make sure you know your files. Collect as much information as possible on the outstanding debt. Are there financial issues? Is there a dispute about quality of products or services? How is the current commercial relationship between creditor and debtor? Being informed is essential to enter the debt negotiations well-prepared.

The debt Negotiator should show Empathy

The debt negotiator should show empathy for the creditor, but also for the debtor. Showing empathy does not meaning having sympathy or agreeing with any of the arguments that the debtor has. The debt negotiator should try to understand the debtor’s position, by listening and showing to the debtor that his or her problems, arguments, and issues are being heard and taken into consideration. 

The Debt Negotiator must determine Leverage

Equally as important, is determining the leverage you have as debt negotiator. The leverage may be positive or negative, in other words, the debtor can gain something by cooperating or loose something. Positive leverage may mean that if debtor pays, he or she may be able to pick up the commercial relationship and make use again of the creditor’s services. Negative leverage is for example the ability to enforce payment legally and in final instance, seize debtor’s assets.

Strategy for the Debt Negotiations

Once you have done the file assessment, have showed empathy towards the debtor, and have determined your leverage for the debt negotiations, you should put together a strategy. What is the ultimate payment term? How many installments is the creditor willing to accept in case of a payment plan? How much is the discount creditor is willing to grant, in case of a service or quality-related dispute? Once you have a strategy, stick to it.

Evaluation of Negotiation Results

Eventually, as a conclusive part of the debt negotiation circle, the debt negotiator should evaluate the debt negotiation process, the strategy used and the results. Every debt negotiation in international business is a learning moment, and evaluation strengthens your position in future negotiations.

Debt negotiations in international business can be complicated. The debt negotiator should go well prepared into the debt negotiations, by doing an in-depth file assessment. During the negotiations, the debt negotiator should show empathy towards the debtor. Also, the debt negotiator must determine the leverage he or she has. Then, a strategy for debt negotiations should be put together. Finally, you should evaluate the results of the debt negotiation process, to learn for the next case of outstanding debt in international business.

David Zannoni

Account Receivables in the Audiovisual Industry

The audiovisual industry is a multi-billion-dollar industry that covers the whole ecosystem consisting of production, distribution and exploitation of audiovisual content like films, TV series, animation, music, programming, and video games.

In our series about collections in international business sectors, in this article we will assess what characterizes account receivables management in the audiovisual industry. We will focus on license agreements, royalties, the audiovisual supply chain and relationships.

License Agreements in the Audiovisual Industry

Firstly, we should look at how revenues are generated in the audiovisual industry. Generally, revenues consist of so-called royalties in connection with intellectual property. These royalties become contractually payable when the distribution rights of audiovisual content are exploited. In general, such distribution rights are licensed from one party to the other under so-called license agreements or distribution agreements. The licensor grants the licensee the right to exploit content in specific media, in a certain territory, for a determined period of time. In exchange, the licensee pays the licensor royalties for the distribution rights. The royalties can be based on a formula whereby licensee and licensor share the royalties generated in the licensee’s jurisdiction, or the licensee can pay the licensor an advance, or minimum guarantee, for any and all royalties generated. Licensor invoices the licensor the royalties due under the license agreement. It is important for accurate and effective account receivables management to understand how the licensing of the distribution rights work, and how in return royalties are generated and invoiced. 

Understanding the Audiovisual Supply Chain and How Royalties Flow

Secondly, it is important to have an understanding of how distribution in the audiovisual industry works and where royalties come from. In the most simplified model, distribution in the audiovisual industry takes place from one licensor to one licensee, whereby the licensee exploits the distribution rights exclusively through its own channels. This is the case for example for the traditional movie studios, the streaming platforms and large TV networks. In such case, royalties will flow directly from the single licensee to the licensor. 

However, it can also be that a licensee, in order to exploit the rights, needs to sub-license the distribution rights in order to generate revenues. This is the case in an independent distribution model, whereby the licensee is a smaller, independent distributor, who sub-licenses the distribution rights to for example TV networks, streamers, video stores and cinemas, in the case of movies. Royalties in this scenario will flow from the sub-licensee (or exhibitor), to the licensee (the distributor), and from there to the licensor.

Often, if audiovisual projects are sold by an international sales agent rather than by the licensor directly (which is more of a rule in case of independently produced projects, especially in film, animation and TV series), the royalties will even pass via an additional layer, being from the licensee (or in fact, from multiple licensees) to the sales agent, and from the sales agent to the licensor.

Account Receivables and Relationships in the Audiovisual Industry

Finally, it is essential to understand that the audiovisual industry is predominantly a relationship business whereby people generally know each other personally and are continuously in business with each other. This can at the same time be of benefit to account receivables, as well as cause disadvantages. The benefit is that people often know a lot about each other’s businesses and solving an issue with an invoice can be a phone call away. On the other hand, the disadvantage can be that people are destined to continue working together, causing that often a soft approach ends up in delays and interference with effective account receivables management. This is the reality an account receivables executive will need to deal with.

To effectively and accurate carry out account receivables management in the audiovisual industry, it is important to understand its characteristics. We specifically discussed how license agreements work, pointed out the importance of understanding the supply chain and how royalties flow, and how essential relationships are and how this affects account receivables.

If you want to know more about account receivables managementfor the audiovisualindustry,or for international business sectorsin general, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

David Zannoni