Export Credit Risk; International Commercial Risk, Export Trade Credit Risk

Accounts receivable, collections, and payments present certain risk factors for the exporter. Conversely, the importer also has risk factors concerning their accounts payable. These risks include not only the actual payment for goods sold, but also extend to the shipment, quantity and quality of the products being purchased.

While an exporter is primarily concerned with receiving payment, the importer is more interested in the proper goods being shipped in a timely fashion. Thus, the risk factors to the exporter and importer tend to be the opposite of one another.

Exporter's Commercial Risk Factors

The exporter's commercial risk factors include the following:

• Non-payment
• Slow payment
• Rejection of merchandise
• Loss of merchandise with no payment
• Return of merchandise with extra cost of freight charges both outward and inward
• Interest or cost of money on delayed payments
• Loss on sale of stranded merchandise plus demurrage (dock storage) charges
• Extra insurance costs
• Partial payment with loss of merchandise
• Arbitration costs
• Additional collection costs
• Court costs
• Adjustment costs
• Communication costs
• Finance costs 

The best way for an exporter to protect himself or herself from financial risks would be through a credit investigation of the importer. This will help determine not only the importer's ability to pay, but also the importer's payment history. The payment history reflects the reliability of the importer in meeting past payment obligations. Additionally, the exporter must decide how much of a credit limit to extend, and what the payment terms will be. In making this determination, the exporter should obtain the following financial information:

• Importer's financial statements
• Importer's bank reports
• Exporter's bank research reports through correspondent banks
• Commercial credit reports such as Dun and Bradstreet International or Veritas
• Other creditors' experience
• Trade credit services 

Additionally, U.S. exporters may protect themselves against non-payment is by taking out insurance issued by public or private insurers. They include the following:

• Export-Import Bank of the United States (Ex-Im Bank)
• Foreign Credit Insurance Association (FCIA) Management Company, Inc.
• American International Group (AIG)
• Other private insurers 

Ex-Im Bank

The Ex-Im Bank is an agency of the United States Government. Ex-Im Bank insurance insures U.S. exporters against the risk of non-payment by foreign importers due to various political and commercial factors. Commercial risks include losses resulting from an importer's insolvency or failure to pay within six months after the due date of an insured obligation. Political risks are defined as losses resulting from dollar transfer delays, war, revolution, diversion of goods and similar politically related incidents occurring in the importer's country which result in a loss to the U.S. company. Certain restrictions apply as to U.S. content requirements of exported goods and/or the country in which the importer is domiciled.

FCIA, AIG, and Other Private Insurers

Private insurers such as FCIA and AIG also provide U.S. exporters protection against the risk of non-payment by foreign importers. An exporter may choose to use private sector insurance when sales to countries may not be covered by Ex-Im Bank, foreign content exceeds Ex-Im's maximums, exporting to places such as Puerto Rico (which is not considered a true export), or to obtain more attractive policy terms.

Importer's Commercial Risk Factors

The importer's commercial risk factors include the following:

• Full or partial payment with no service or merchandise having been provided
• Payment with faulty or inferior merchandise
• Payment with insufficient quantity of merchandise
• Payment with late merchandise
• Demurrage costs and late documents
• Late shipment with loss of market after payment
• Court costs & legal fees
• Adjustment costs
• Delays due to incorrect documents
• Arbitration costs
• Cost of money
• Extra finance costs

The importer is primarily concerned with whether the exporter can and will ship the goods. The importer needs to determine if the exporter has the ability to produce or obtain the goods, as well as whether they will ship the product in a timely fashion. The importer also is interested in knowing if the goods will be of the quality and quantity expected. To help answer these questions the importer should obtain much of the same type of information on the exporter that an exporter obtains about an overseas importer. The difference being that an importer would want to investigate items such as trade references from other importers and/or references available through local World Trade Centers or Chambers of Commerce.

Political and Economic Risks

In addition to commercial risks, both exporters and importers in international transactions are subject to foreign political, economic, and exchange risks.

The exporter's international risk factors include the following:

• Currency conversion prohibited or delayed
• No payment due to government confiscation of shipped goods
• Hostile laws and courts
• Civil war
• Nationalization of industries resulting in delayed payments
• Government decree postponing payments
• Merchandise prohibited from entering country
• Government change in merchandise standards or markings
• Devaluation of currency
• Boycotts 

The importer's international risk factors include the following:

• Import license canceled
• Export license canceled
• Merchandise confiscated
• Hostile courts or laws
• Import quota full after late shipment by exporter
• Devaluation of currency
• Civil war
• Boycotts and economic sanctions
• Increased customs duties or tariffs

Importers and exporters should familiarize themselves with information concerning the economic and political stability of the country in which they are doing business. This information should also include current and future trends of the country's economy, political situation, and the possibility of the implementation of exchange control. Either the importer's or exporter's international bank could be used as a source for this type of information. Other sources are foreign country consulate offices and various publications produced by Dun and Bradstreet International, U.S. Department of Commerce International Trade Administration, Moody's, local Chambers of Commerce or World Trade Centers.

Currency Risk

One of the uncertainties associated with international sales involves fluctuating foreign exchange rates. The fluctuating value of the currency can affect the profitability of a sale made to a foreign customer that is to be paid in a currency other than the currency used in the exporter's country. Fluctuating foreign exchange rates are of particular concern in emerging markets, where it may be difficult to gauge the severity of changes in the value of the local currency, and where it may be difficult to offset foreign exchange risk. Emerging markets can have trade deficits, foreign exchange shortfalls, freezes on payment of imports, and other activities that can lead to a sudden devaluation of the currency. The willingness and ability of a country's central government to support their currency is a factor in assessing foreign exchange risk.

In any export sale, the decision about whether the importer or the exporter will bear the currency exchange risk is a significant factor. Both the buyer and seller would prefer the sale to be denominated for payment in their local currency. Typically the seller will dictate the terms to the buyer since it is the seller that bears the risk of slow payment or non-payment assuming the buyer is offered open account terms.

It is possible to accept payment in a foreign currency and offset the exchange risks by purchasing contracts [through a bank or other financial institution] that "hedge" against foreign exchange fluctuations. This process requires expertise, can be time consuming, and involves additional costs to the exporter. The following resources can provide assistance:

The Atlantica Associates (http://www.aainternational.org)

This firm provides a currency risk measure that is an indicator driven by measures of a country's international liquidity, its international debt burden, actual exchange rate fluctuations measured over time, as well as by the latest pattern of commodity price changes. This risk measure captures the interaction between a country's export prices relative to its import prices.

Credit Mutuel (http://www.cmutuel.com)

Credit Mutuel forms a national network of regional banks at European scale. Its site provides information on the progress of the European union, snapshot of the member states, banking regulations, news, and a currency converter. It also has the frequently asked questions and answers on the Euro.

Foreign Exchange Rate Data (http://www.uta.fi/~ktmatu/rate-gbp)

Institute of International Bankers (http://www.iib.org)

This is an association of over 200 banking organizations that operate in the U.S. and have their headquarters in 50 other countries. It represents the interests of the international banking community before U.S. legislative and regulatory bodies and serves as a source of information on international banking issues.

OCC (Office if the Comptroller of the Currency) (http://www. occ.treas.gov)

The OCC regulates national banks. This site offers agency information, releases, publications, software, and consumer information.

Transaction Risk

Risks Associated with Customs and Laws

Incoming shipments are often subject to regulations of the importing country. The failure of the exporter to prepare carefully and complete all required documents could result in delays in clearing goods through customs, obtaining foreign exchange, or in some cases confiscation of goods and heavy fines. Documentary requirements may include shipping, packing and marking requirements, import licenses, and pre-import approval for foreign exchange.

International Financial Statement Analysis

In deciding whether to extend credit or terms to a foreign buyer, a credit professional must look at several factors. One of the most basic requirements is to analyze the buyer's financial statements. When reviewing foreign financial statements, there are additional considerations including these:

• foreign financial statements are usually denominated in a foreign currency
• foreign financial statements usually are not formatted in the same was as U.S. financial statements
• foreign statements do not follow the same accounting rules
• the reliability of audited financial statements is questionable in some parts of the world 

Creditors generally look at short-term extensions of credit. As in domestic credit granting, creditors tend to focus on short-term liquidity and on profitability as key elements in financial statement analysis. Other factors to consider when evaluating foreign financial statements include:

• The credit limit being requested
• Whether the company's sales are growing, stable or declining?
• How is this company doing in comparison to other firms in the same field?
• Are the terms of sale requested consistent with what other creditors are offering, and does it appear the customer has the cash on hand to pay the debt as it comes due 

One of the most common methods of analysis is financial ratio analysis. Key ratios to consider include the following:

• Current ratio
• Quick ratio
• Inventory turnover ratio
• Total debt to equity ratio
• The return on assets
• The return on investment
• Net income on sales 

The international aspect of the situation requires a different level of analysis. Even if the company has the money, it may not be able to pay a foreign seller because of government controls on foreign exchange, seizure of assets by the government, banking problems, strikes, war, or civil unrest. 

Accountants outside the U.S. do not follow Generally Accepted Accounting Principles when preparing or auditing financial statements. In some parts of the world, customers may have more than one set of financial statements for different reporting purposes.

While an analysis of foreign financial statements can and should be performed in spite of their limitations, this analysis should be augmented with bank and trade references as well as a credit report on the applicant company.

Many sources exist for country risk information. Banks, the U.S. Department of Commerce, and consulates are some examples. Country risk relates to the potential for payment delay or default caused by factors beyond the control of the buyer. An example would be a decision by the central bank in the buyer's country to freeze all foreign currency assets.

Creditors can request and will occasionally receive financial statements from foreign customers. These statements should be reviewed with great care. Foreign financial statements are normally not prepared or formatted in the same way as U.S. financial statements. For example, assets may be listed in a different order from the way they would appear in financial statements prepared based on US GAAP. In some cases, accounts that would be defined as liabilities under US accounting rules are classified as equity (and vice versa).

There are several other drawbacks to accepting and analyzing foreign financial statements, including these:

• Most creditors have no idea about the standards of training required of independent auditors in foreign countries.
• Many foreign countries do not have the anything approaching the auditing rules in place in the US.
• Consequently, credit professionals have no way of assessing the accuracy of financial statements presented by a foreign customer - including audited financial statements.
• Even if foreign financial statements have been "audited," credit managers often have no idea about the scope of the audit, or whether or not the auditor is a related party or is truly independent.
• The statements will be denominated in a foreign current, not in US dollars, necessitating currency conversions. 

For all of these reasons, foreign financial statements must be looked at with a degree of professional skepticism.

Credit Reporting Agencies Worldwide

Credit Management Services and Information (http://www.anscers.com)

Credit Management Information & Support (http://www.creditworthy.com)

Lists credit reporting agencies by country. Also provides information, products, services and programs to the Business Credit Community.

Annual Reports Library (http://www.zpub.com/sf/arl/)

Annual reports, useful links, and other information for obtaining a company's financial information online.

Report Gallery by IntraGrafix (http://www.reportgallery.com)

Lists over 2,200 annual reports online.

The Commercial Service of the U.S. Department of Commerce (http://www.ita.doc.gov/gov/uscs)

Assists U.S. firms in realizing their export potential by providing expert counseling and advice, information on markets abroad, international contacts, and advocacy services. It has Export Assistance Centers throughout the U.S. and in more than 70 countries abroad.

The U. S. Government (http://www.stat-usa.gov/imi.nsf)

U.S. embassy personnel prepare reports called International Market Insights. It covers topics such as trade laws and regulations, business customs, recent market developments, and monetary and fiscal measures that affect U.S. exporters.

The National Trade Data Bank (http://www.stat-usa.gov)

Over 200,000 trade-related documents, including market research reports, trade leads, trade contracts, statistical information, and sovereign reports complied by 19 different federal agencies.

Reference Books

Handbook of International Credit Management by Brian W. Clarke

A comprehensive guide to all aspects of granting, controlling, and financing international credit.

Export/Import Procedures and Documentation by Thomas E. Johnson

Includes over 100 sample documents, required forms, and start-to-finish instructions. It also includes customs audits customs compliance assessments and information on export control regulations

A Short Course in International Payments by Edward G. Hinkelman

Shows how to use L/C, D/P and D/A terms, prepayment, credit and cyberpayments in international transactions.

Credit Associations Worldwide

Australia

Australian Institute of Credit Management
Suite A, 130 Hainpden Road
P0 Box 558
Artarmon NSW 2064
Australia
Tel# 612-413-4298, Fax# 612-413-2299

Belgium

Association Beige Du Credit asbl
rue du Saphir, 33
1040 Bruxelles
Tel# 322-736-1238, Fax# 322-736-6107

Canada

The Credit Institute of Canada
5090 Explorer Dr., Suite 501
Mississauga, Ontario L4W 3T9
Canada
http://www.creditedu.org
Tel# 905-629-9805, Fax# 905-629-9809
Brenda Cornell, General Manager

Denmark

Dansk Kreditchef Forening
Gammel Moent 4
1117 Copenhagen
Denmark
Telep. (+45) 33111200
Fax. (+45) 33111207

Finland

Luottomiehet Kreditmannen ry
PL 16
00581 Helsinki
Finland
Tel# 358-0-148-861, Fax# 358-0-735-338

France

Association Francaise des Credit Managers
11 rue Richepance
75008 Paris France
Tel# 33 1-40209574, Fax# 33 1-42975064

Ireland

Irish Institute of Credit Management
1st Floor
46 Fontfield Park
Terenure Dublin 6W
Ireland
Tel# 3531 8725566, Fax#353 18723109

Israel

The Israeli Institute of Credit Management
P0 Box 1886
Ramat-Gan 52117
Israel
Tel# 972-3575-1433, Fax# 972-3575-1499

Italy

Associazione Credit Managers Italia (ACMI)
Unione del Commercia e del Turismo
della Provincia di Milano
Corso Venezia 47/49 20121 Milano
Italy
Tel# 392-76000598, Fax# 392-76005543

Latin America

The Latin American Association for International Business
Prado Norte 618, ler Piso
Lomas de Chapultepec
CP 11000 Mexico DF Mexico
Tel# 52-5-540-0555, Fax# 525-540-6637

Japan

Association of Credit Depts
Commercial Law Centre
(Shooji Hoomu Kenkyuu-Kai) Tokyotatemono
Kigashigyaesu Building
27-10 Hatchobori 2
Chome Chuoku
Tokyo 104
Japan
Tel# 813-355-24945, Fax# 813-355-5 1300

Malaysia

Association of Credit Management
Suite 8.05
8th Floor, Wisma KUMB
113 Jalan Pudu
55100 Kuala Lumpur
Tel# 03-232-10899 1

Netherlands, The

Nederlandse Vereniging voor Credit Management
P0 Box 1483
5602 BL Eindhoven
Netherlands
Tel# 31-404-82773, Fax# 3 1-404-29425

New Zealand

New Zealand Credit & Finance Institute
P0 Box 540
Wellington New Zealand
Tel# 644-802-2429, Fax# 544-802-2418

Norway

Norweigian Credit Management Association
Norks Kredittforuni
PB 910
N-5001 Bergen
Norway
Tel# 47-55-311187 Fax# 47-55-319494

South Africa

P0 Box 345
Cape Town 8000
South Africa
Tel# 27-21-41-2010, Fax# 27-21-21-7098

Spain

Asociacion Gerentes Credito
109-1 la Entrescelo 3a
08029 Barcelona
Spain
Tel# 3-239 1660

Asociacion Gerentes Credito
Estebanez Calderon
7-4-A
28020 Madrid
TeI# 343-439-1660

United Kingdom

Institute of Credit Management
The Water Mill
Station Road
South Luffenham
Oakham
Leicestershire LE1 5 8NB
Tel# 01780-721888, Fax# 01780-721333
http://www.icm.org.uk

United States

Business Products Credit Association I
4323 South Outer Forty Dr. Suite 100 S
St. Louis, MO 63019
http://www.bpca.org

Credit Research Foundation
8815 Centre Park Drive
Columbia, MD, USA 21045
Tel# 410-740-5499, Fax 410-740-4620
http:/www.nacm.org/crf/crfhome.shtml

National Association of Credit Management
(NACM)
8815 Centre Park Drive, Suite 200
Columbia, Maryland 21045 USA
Tel# 410-740-5560, Fax# 410-740-5574
http://www.nacm.org
Affiliate Occurs when 50% or less of an entity's stock is held by the parent company. Occurs when 50% or less of an entity's stock is held by the parent company. List: http://www.nacm.org/affiliates.html

Zimibabwe

The Institue of Credit Management
No 1 Ailsa Court
73A Joshiah Tongongara Street
P0 Box AC 128, Ascot
Bulawayo
Zimbabwe
Tel# 263-9-77 105

Edited by Michael C. Dennis, author of several books including: "Credit and Collection Manager's Handbook."  Mr. Dennis is an author and business consultant.  He can be reached by email at mcdennis13@yahoo.com