What credit managers should know

Business Asia, August 2, 1999

Negotiating payment terms and minimising risk is crucial - and complex - for exporters. The Export Finance and Insurance Corporation (EFIC) offers some advice.

Exploring viable export credit management alternatives can be time consuming, but it can have significant rewards for your company.

Five key export credit management areas in which a credit manager can seek improvements are: payment terms; credit information; assessment of buyers; monitoring payment; and credit systems.

Payment terms

Understand how your company will be paid and understand the terminology. Will it be through a bill of exchange, a letter of credit (LC), cash against documents or so forth?

Ensure you can meet the terms and comply with an LC. If you can't, the establishing bank may withhold payment under the terms of an LC, even if you've complied with the original contract you exchanged with the buyer.

Remember that an LC is only as good as the issuing bank. If the issuing bank is in financial difficulty or is in a market experiencing economic problems, then the bank may not be able to honour the LC.

When exporting to a new buyer or new market, try to use more secure terms until you're comfortable with the risks.

Credit information

Set and agree credit limits with your insurer or bank.

Review credits limits on a regular basis and share any information with your insurer as country and buyer circumstances can change overnight. For instance, the 1997 Indonesian economic crisis.

If you don't have credit insurance, consider obtaining credit information on your buyers to assist you with strategy creation and setting credit limits. Remember, external factors outside the control of your buyer can affect their ability to pay.

Assessment of Buyer

It is important to have a good relationship with your buyer. By understanding how well they're performing, you can make better decisions and manage issues that may arise before they become a problem.

Know your risks. Understand the legal, cultural and economic elements of the buyer market.

Visit your buyer. Ask for information from them. For instance, get financial statements, corporate brochures and the like. Talk to your bank and insurer and find out as much as you can about your buyer.

Consider diversification. By exporting to a number of buyers in a variety of markets and industries, your company may become less vulnerable to uncertainties affecting one industry or market.

Be wary of substituting an existing buyer with payment problems for a relatively new buyer, as the industry itself may be experiencing difficulties - make sure you assess all opportunities thoroughly.

If you think a buyer is having difficulty in paying, halt all further exports (if you can) until you understand the issues. For all future transactions with that buyer, consider asking for prepayment or alternative secure terms to reduce the risk of not getting paid.

Have a legal representative review the contract to ensure your company can meet the obligations outlined.

Monitoring payment

Be sure to assign responsibility for tracking the shipment to an individual within your company. Ensure they know and understand the trading limits that apply to all your buyers.

In addition, make sure all appropriate people within your company are aware of payment problems when they arise.

Ensure all your documentation is correct and that you can meet your obligations under the contract or LC.

Define your contingency plans in the event of a payment delay, payment dispute or if your buyer refuses to pay.

Credit systems

Have a system that provides you with up to date and accurate information about outstanding invoices and buyer status reports.

In relation to outstanding invoices, have a system that automatically prompts follow-up calls and issues statements after they've elapsed.

When assessing risk, the credit manager has to decide whether to accept the risk of possible non-payment or sell down the risk. Bank and/or insurance agencies are the most logical accepters or purchasers of risk.

One insurance agency that works closely with exporters to manage risk is the Export Finance and Insurance Corporation (EFIC). Working with many diverse exporters -- ranging in size, type and industry -- EFIC provides payment protection in the event the overseas buyer can't pay via credit insurance.

"Doing business overseas is challenging. It can be made simpler if exporters deal only with trusted export partners. Unfortunately, buyers are only one piece of the puzzle," said EFIC's general manager Geoff Hickey.

"Even if exporters are dealing with partners they trust, pressures outside the control of their buyer(s) can cause even those with the best intentions to fail to meet their payment obligations. Which is why the management of risk is an issue EFIC takes seriously."

Export credit insurance can help companies leverage a competitive advantage, minimise credit risk and negotiate trade finance.

* For further information on EFIC's export credit insurance facility, contact EFIC toll free on 1800 685 109. Alternatively, visit its website at www.efic.gov.au.