Q. How should exporters manage risk?

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A. Managing the risk when exporting

Export Markets:

When considering a move into any export market, a company should undertake a full analysis of the market. The focus of this study should be to establish a demand for their product in that market. The study may vary depending on the type of good being sold but should include assessments of social, economic and cultural factors that might effect the demand for the company’s product. If the product is already being supplied by local companies, the exporter will clearly need to identify areas of competitive advantage that will support the launch of his product in that market.

Most governments provide a wide range of supports to assist companies in developing overseas markets. Information in Ireland is available from Enterprise Ireland, Irish Exporters Association, embassies, consulates and trade associations.

Country Risk:

Exporters often overlook this risk. In fact, it is often the occurrence of some political or economic catastrophe that highlights this risk to an exporter. The end of the 1990s brought many examples of the effects that poor assessment of country risk issues can bring. The Asian crisis in May 1997 and the Russian Government’s declaration of a debt moratorium in August 1998 resulted in some losses for exporters that had not purchased protection against country risk events.

Exporters should ensure that they fully assess the political and economic situation in their buyer’s countries. Countries with unstable political environments or with poor economic performance should be approached with caution. Information is available from a wide range of sources including newspapers, news agencies, economic journals, credit reference agencies, embassies, banks and export support agencies. Exporters should ensure that their credit policies clearly indicate the countries within which their sales force may operate.

Protection against the country risk can be obtained through an exporter’s bank or through the purchase of export credit insurance.

Buyer Risk:

The risk of non-payment by a buyer for goods shipped to them is a major concern for an exporter. The assessment of this risk should be undertaken in the same manner in which an exporter’s bank would assess the creditworthiness of the exporter himself. The shipment of goods to a buyer prior to the receipt of payment is similar to providing the buyer with a loan. If exporters had to lend cash to their buyers (rather than goods), would they provide credit facilities so easily. The fact that exporters have to lend to buyers located overseas only increases their risk profile.

Exporters should establish clear credit control policy and procedures. The key to sound credit assessment is information. Credit control should start by establishing the correct name and address of the company they are selling to. Information can be obtained from newspapers, published accounts, company registry offices, banks, credit reference agencies, government export support agencies and even from other exporters. In addition to reviewing financial data on the buyer, exporters should also check on the buyer’s reputation, payment record and general standing in the industry. Credit assessment also needs to consider the general and specific environment within which the buyer operates. (See section on Country Risk)

In considering the granting of trade credit, exporters should also consider how they can reduce, mitigate or even eliminate their credit risk exposures. Banks provide a range of payment options that can help to mitigate and eliminate trade risk. In addition, exporters should consider purchasing export credit insurance to reduce their exposure to credit risk.

Damage to goods in transit:

This risk is easy to protect against, as there is an established insurance market covering the risk of damage to goods in transit. Exporters need to establish at the outset whether they or their suppliers are responsible for arranging the transit insurance. The responsibility of the parties in relation to insurance are set out in the International Contract Terms (INCOTERMS) published by the International Chamber of Commerce, Paris.

Exporters should consult their insurance broker or company for advice.

Payment:

The securing of payments for goods shipped is a major concern for any exporter. The exporter has various options in relation to payment that can be agreed with the buyer:

Payment in advance: The buyer agrees to pay the exporter prior to the goods being shipped. Funds are sent to the exporter by telegraphic methods through the banking system or directly by cheque or bank draft to the exporter. The exporter should only ship once they have received cleared funds in their account.

Letter of Credit: The buyer arranges for their bank to issue a Letter of Credit (LC) on their behalf in favour of the exporter. The LC is a conditional guarantee of payment from the buyer’s bank to the exporter. The LC is paid by the buyer’s bank once they receive the shipping documents evidencing the shipment of the goods by the exporter. The documents, against which payment is made, are agreed between the buyer and exporter at the time of signing the sales contract. This mechanism eliminates the exporter’s exposure to the risk of the buyer defaulting, as they know that the buyer’s bank will have to pay them once they provide documentary evidence of shipment of the goods in accordance with the terms and conditions of the LC.

Documentary Collections: The exporter agrees with the buyer that payment will be made upon receipt of the shipping documents at the counters of the buyer’s bank. The exporter’s bank will forward the shipping documents to the buyer’s bank and will authorise the release of the shipping documents to the buyer against their immediate payment or undertaking to pay at a determined future date. Documentary collections often use a Bill of Exchange to evidence the demand for payment on the buyer and to evidence the buyer’s agreement to pay at a determined future date. The exporter can ensure that the buyer will only gain access to the shipping documents once they have paid or committed to pay for the goods.

Open Account: The exporter agrees to ship the goods to the buyer and accept payment by telegraphic means or by bank draft at an agreed date after shipment of the goods. The exporter loses control of the goods without receiving any commitment to pay from the buyer other than the contractual liability of the buyer under the sales contract. The exporter is completely exposed to the default risk of the buyer.

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