SITPRO Simplifying International Trade

Download PDF EditionManaging the Risks of International Trade
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This guide provides information that will help you to put procedures in place to minimise the risks involved in international trade.

You should read it if you are responsible for planning and delivering the export strategy in your company. You should make sure that the information in this briefing is read by your sales and marketing force, your finance management team, your credit manager and the sales ledger controller.

What types of risks will I have to manage?

Customer Risk:

You will need an assessment of the credit worthiness of your customer. This should include checking the following:

You can obtain the information needed to carry out these checks either yourself or through a reputable credit agency or credit insurer.

Country Risk:

As well as your customer, their country can pose separate risks that you will need to manage. Country risks traditionally fall into five areas:

Credit Risk:

Perhaps the first question you should ask is 'Can I afford to give my customers credit?' To decide how much credit you are prepared to advance you must consider :

Foreign Exchange Risk:

When you trade internationally you will most likely be dealing in more than one currency. This means you are exposed to fluctuations in the foreign exchange market. You can learn how to manage this risk by referring SITPRO's guide on The Foreign Exchange Market.

Other risks:

If you manufacture goods to order you must include in your export strategy a contingency that will help you manage the risk of a frustrated export - this is when your customer refuses the goods. You should have a plan to either resell the product to another market or realise a salvage value for your goods.

You must also have procedures in place for the collection of your invoice amount. Under your contract you may have to collect your money in your customer's country. This does have its risks as collection maybe more uncertain or expensive, so you will have to consider the legal system in their country. Your contract may, however, allow you to take legal steps to recover your debt in another country, including your own.

How do I manage these risks?

You can do the job yourself or employ the services of a comprehensive credit management and insurance provider. If you decide, for sound business reasons, to do the job 'in house' then you must have the resources and knowledge to:

If you decide to go down this route, you will have to consider the financial and other impacts on your business. These include senior management ownership of the credit management strategy; the allocation of sufficient time, resource and money to do the job, and a review of your export catalogue prices. You must remember to include the costs of 'in house' risk management and extending credit terms in your export quotes. Otherwise, a profit can soon turn into a loss as administrative costs eat into your bottom line.

What types of risk management and insurance services are available?

Classically, these are the approaches adopted by the business sector, based on the pattern of trade of the exporter.

Type of business

Products and services

Depending on your type of business, the following products and services are available to you:

Where do I obtain these services?

You can approach specialist credit management and insurance providers, or your insurance adviser (broker, agent or intermediary). A list of credit insurance companies can be obtained from SITPRO, British Chambers of Commerce and the Association of British Insurers. Details of specialist advisers can be obtained from organisations such as the British Insurance Brokers Association.

With their worldwide networks credit insurance companies have years of experience and expertise in analysing and covering the risks involved in international trade. In addition to covering commercial debts and indemnifying you if your customer fails to pay, they can provide you with guaranteed cover which could improve your cash-flow, provide confidence to maximise your export sales and may enhance your borrowing power.

The use of credit insurance imposes on your company a disciplined and professional approach to trade risk management. Adopting this solution can help reduce your bad debts, improve your competitiveness in the global marketplace and increase your profitability.

Are there any other options open to me?

There are other financial solutions to you credit management risks:

How much will it cost me?

Like all insurance cover (premises, employer's liability, business interruption) you will have to pay for your risk management and insurance services. Policies based on a specific risk are available and premium is usually on a 'one-off' basis. Premium is calculated according to the specific risk in question, credit period offered, your customer's country and the duration of the risk from the insurer's perspective.

There are also credit insurance policies and managed schemes that will cover all of your export turnover. Premium is usually annual and assessed against your estimated insurable turnover (the sales on credit covered). With your credit insurer you will have to agree your target export turnover for any one year. Typically, you can expect to pay between 0.35% and 0.65% for this type of policy, dependent on your products, the number of customers and range of your export markets, your export trading experience, and your own credit management system. As with all insurance cover, you should spend time researching the market and getting quotes from a range of credit insurance providers.

The costs quoted are based on typical policies available for small or new exporters wishing to cover sales with fairly short delivery and payment profiles. Costs will rise for specific policies where the horizon of risk for the insurer might be 2 or 3 years as in the case of ECGD cover for capital goods projects.

Conclusion

Credit insurance is an important risk management tool to help you protect the payment of your overseas accounts and unlock the full potential of your export business. You should carefully consider including it in your global trading strategy.

Disclaimer

Whilst every effort is made to ensure that the information given herein is accurate, SITPRO Ltd. accepts no legal responsibility for any views expressed or implied or for any errors, omissions or misleading statements in that information caused by negligence or otherwise.

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