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Analysis of International Commercial Risk Accounts receivable, collections, and payments have 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:
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:
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:
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:
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:
The importer's international risk factors include the following:
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:
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:
One of the most common methods of analysis is financial ratio analysis. Key ratios to consider include the following:
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:
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 Belgium Association
Beige Du Credit asbl Canada The Credit
Institute of Canada Denmark Dansk Kreditchef
Forening Finland Luottomiehet
Kreditmannen ry France Association
Francaise des Credit Managers Ireland Irish Institute
of Credit Management Israel The Israeli
Institute of Credit Management Italy Associazione
Credit Managers Italia (ACMI) Latin America The Latin
American Association for International Business Japan Association
of Credit Depts Malaysia Association
of Credit Management Netherlands, The Nederlandse
Vereniging voor Credit Management New Zealand New Zealand
Credit & Finance Institute Norway Norweigian
Credit Management Association South Africa P0 Box 345 Spain Asociacion
Gerentes Credito Asociacion
Gerentes Credito United Kingdom Institute
of Credit Management United States Business
Products Credit Association I Credit Research
Foundation National
Association of Credit Management Zimibabwe The Institue
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