Export Credit Risk Assessment

Export credit management is generally a back room activity but what could be more important than ensuring that payment is received and is received on time and in an appropriate currency. A key role of the export credit manager is to assess the risks involved in export contracts and to apply credit limits, payment terms and a method of payment which relates to, and mitigates, the risk.

Many exporters are now considering increasing their market portfolio into emerging markets, often developing, low income, lower middle income and middle income countries. Indeed, this appears to be an element of the Government’s post-Brexit strategy for export expansion and a target for the FCO Prosperity Fund.  Such markets have become increasingly interesting with rapidly growing economies and buying power but payment risk can be high and foreign exchange, often, scarce and tightly regulated. Consequently, the export credit control department has an increasingly crucial role to play in allowing sales expansion by managing the risks involved in trading in new, potentially highly lucrative, regions and markets.

When trading in the domestic market credit assessments are usually limited to considering the commercial risk of non-payment by the customer. There can be several reasons for such default but, essentially, the buyer will have made a decision to default on the payment. When trading across borders there are several addition risks to consider and these are not within the control of the customer. These may include the non-availability of foreign exchange, sovereign / political risk, including trade control measures, and banking risk. These additional risks can be huge deterrents to new trade for the risk averse exporter. Exporters may consider that commercial risks are manageable but other risks, which can be difficult to assess in real time, are much more problematic and difficult to analyse.

All the above underlines the need for robust credit management as a catalyst to export growth. Credit managers need an in depth understanding of the use of the most effective payment methods, particularly documentary letters of credit, and the applicable rules.  Unfortunately, some payment methods have a bad reputation – for example the high discrepancy rates for Letters of Credit presentations can be a deterrent to using such facilities, this is a shame as a correctly opened and configured Letter of Credit is an excellent risk mitigation tool. Appropriate training must be the answer in this respect and a realisation that such instruments protect both the seller and the buyer.

 Importantly, export credit risk assessments must be scientific, informed and extensive. Commercial risk can be assessed in very much the same way as for domestic trading – trade and bank references can be requested and reviewed. As always, the source and credibility of such references must be considered. For large contracts, a visit to the prospective buyer should be considered. Their premises may say a great deal about their credibility and viability. This will not always be cost-effective nor feasible for small or one-off orders. Sales teams should be briefed to make assessments based on what they have heard and seen during business development trips. Banking and sovereign / country risks not only vary by nation but, sometimes, also have seasonal differences, for example in relation to foreign exchange availability or quota allocations. Assessments must be thorough and appropriate, external expertise may have to be sough such as credit risk assessment and credit analysis agencies. Exporters can also approach their banks for latest country credit ratings and credit risk insurance providers will always carry out their own checks on commercial and country risk related to cover they are being asked to provide.

Crucially, the export credit control team must have complete management support. Once a recommendation has been made, for example placing future orders to a late paying customer on hold, this decision must be fully supported – as difficult as that may be. Anecdotal frictions between sales and credit control departments are not unusual but can often be resolved by good information sharing and communication. It must be understood that, arguably, exporting companies don’t go out of business through lack of orders but through lack of money – although, of course, the former leads to the latter!!  Credit controllers and sales teams must take a co-ordinated and co-operative approach – risks must be addressed jointly and there must be an understanding of the linkages between the various credit risks, the contracted Incoterm, the cash flow of the exporter and the reputation of the buyer. This is what must drive the allocation of payment method and payment term. Other influences, such as sales targets must not become part of the decision making process.

Risk mitigation is paramount and export credit controllers should also consider use of appropriate tools where these are available – including credit risk insurance, discounting, factoring and standby letters of credit. Consequently, sound export credit assessments and credit control can be considered a tool for export expansion rather than being viewed as the ‘spoiler’!   

Article written by Jon Walden - Associate of Strong & Herd LLP

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