FAQS

How should exporters manage risk?

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.

How should importers manage risk?

A. Managing the risk when importing.
Supplier:

  •  The importer should use all available information to satisfy himself regarding the bona fides of the supplier. Sources of information include:
  •  credit reference agencies, trade journals, published accounts, company registry offices, other customers of the supplier, trade officers in embassies.
  •  If there is any doubt regarding the standing of the supplier, an alternative supply source should be considered.

 

Supplier’s country:

  • This risk should be considered first, even before that of the supplier. The ability of any supplier to fulfil their contractual obligations will be affected by the political and economic events in their country. A low cost supplier in a high risk country may seem attractive but price should only be one factor influencing any business decision.
  • There are many sources of information on country issues, including: newspapers, news agencies, economic journals, credit agencies, embassies and export support agencies.

 

Quality of goods:

  • Ideally, importers would like to receive and inspect their goods before having to pay for them. Suppliers, on the other hand, would like to receive payment immediately upon shipment.
  • The risks here can be addressed when assessing the supplier risks. If any concerns remain the importer can arrange to have goods independently inspected prior to shipment. Alternatively, the sales contract may indicate that the goods must conform to some independent standards e.g. a British Standard Number.

 

 

Damage to goods in transit:

  • This risk is easy to protect against, as there is a well developed insurance market covering the risk of damage to goods in transit. Importers 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.
  • Importers should consult their insurance broker or company for advice.

 

Credit:

  • Trade credit can be a low cost source of finance. The ability to purchase goods on credit can greatly assist an importer in the management of their cashflow. Trade credit permits the importer to receive the goods and resell them or use them in their manufacturing processes before having to pay the supplier. In many cases, trade credit may be cheaper than borrowing from a bank to pay for the supplies immediately. Inability to access trade credit may pose a risk to the importer’s financial survival.
  • Suppliers will only grant credit to importers that are considered financially sound and are located in economies that are politically and economically stable. Importers may be able to obtain access to trade through the payment mechanism they agree with the supplier. It may cost less for an importer to use their bank facilities to issue a Letter of Credit guaranteeing payment to the supplier at some future date, than to utilise their overdraft facility and pay for the goods at the time of shipment. An offer to accept Bills of Exchange drawn on the importer by the buyer for payment at some future date may also encourage suppliers to grant credit terms.

 

Payment:

  • The importer has various options in relation to payment that can be agreed with the supplier:

 

Payment in advance:

  • The importer agrees to pay the exporter prior to the goods being shipped. Funds are sent to the supplier by telegraphic methods through the banking system or directly by bank draft to the supplier. The importer is exposed fully to the performance risk of the supplier.

 

 

Letter of Credit:

  • The importer arranges for their bank to issue a Letter of Credit(LC) on their behalf in favour of the supplier. The LC is a conditional guarantee of payment from the importer’s bank to the supplier. The LC is paid by the importer’s bank once they receive the shipping documents evidencing the shipment of the goods by the supplier. The documents, against which payment is made, are agreed between the importer and supplier at the time of signing the sales contract. This mechanism reduces the importer’s exposure to the performance risk of the supplier, as they know that their bank will only pay the supplier against documentary evidence of shipment of the goods.

 

Documentary Collections:

  • The importer agrees with the supplier that payment will be made upon receipt of the shipping documents at the counters of their bank. The importer’s bank will act as a collecting agent for the supplier and will only release the shipping documents to the importer 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 importer and to evidence the importer’s agreement to pay at a determined future date. The importer is not exposed to the performance risk of the supplier as they will only have to pay or commit to paying for goods upon receipt of the relative shipping documents.

 

Open Account:

  • The importer agrees to pay the supplier by telegraphic means or by bank draft at an agreed date after shipment of the goods. The importer can receive the goods without giving any commitment to pay, other than their contractual liability under the sales contract. The importer has no exposure to the performance risk of the supplier.

 

What are the financing options for importers?

A. Financing options for importer.

The financing requirements of each importer will be determined by the following:

  1. The cash reserves of the company.
  2. The volume of their sales.
  3. The costs of their materials, labour, overheads etc.
  4. The amount of trade credit granted or received.
  5. The level of investment in fixed assets.
  6. The strength of the company’s credit policies and collection procedures.

 

There are two main sources of finance for importers:

  • Bank Borrowings
  • Trade Credit

 

Bank Borrowings:

Banks and their subsidiaries offer a wide range of financing options to their importing clients including the following:

 

Overdrafts:

Used to support short term working capital needs. Repayable on demand. Security may be required.

 

Term Loan:

Used to fund specific project, investment or fixed asset acquisition. Fixed repayment schedule over agreed period. Security may be required.

 

Leasing/Hire Purchase:

Used to fund asset acquisition. Agreed repayment schedule. Security may be required.

 

Invoice Discounting: 

Source of short term funding. Combination of repayment on demand/agreed schedule. Company’s debtor book provides the main security.

 

Letters of Credit/Guarantees: 

Source of credit enhancement that can improve access to trade credit funding. Combination of repayment on demand/agreed schedule. Security may be required.

 

Project Finance: 

Source of medium to long term funding. Financing provided to support self-financing projects. Agreed repayment schedule. Security may be required.

 

Importers should contact their local AIB branch manager or their corporate relationship manager for details of AIB Group’s credit services. All credit facilities are subject to approval by the bank.

 

Trade Credit:

  • Although many suppliers will factor the cost of granting credit into the cost of their goods, it can still be a relatively cheap and convenient source of funding. However, many importing companies may not be able to negotiate trade credit on their own. Importers may find it easier to negotiate credit terms if they agree to use one of the more secure payment options such as Letters of Credit or Documentary Collections.
  • An importer offering to accept Bills of Exchange or issue a Promissory Note under a documentary obligation may find their suppliers are more willing to grant them credit terms. This is because suppliers are aware that in many countries failure to honour an accepted Bill of Exchange or pay a Promissory Note may be considered an act of bankruptcy and that the legal processes supporting the enforcement of such obligations are relatively cheap and efficient.
  • An importer offering Letters of Credit as a payment option is utilising their access to bank credit to gain extended trade credit. Issuing a Letter of Credit can encourage a supplier to extend credit to an importer in circumstances where the supplier would not normally extend credit. The independent bank guarantee inherent in a Letter of Credit provides suppliers with confidence that they will be paid. The importer will find that using Letters of Credit, to defer the payment for goods to a future date, involves lower costs when compared to using their overdraft or other bank facilities to pay for the goods immediately, either at time of shipment or delivery.
What are the risks facing exporters?

A. Assessing risk for an exporter.

 

Selling outside your domestic market increases the risk profile of any company.

Exporters encounter risk in many areas and need to consider some key questions as follows:

 

Export Markets:

What markets are open to the exporter and their products? Will the product sell overseas? Will exporting be profitable for the company?

 

Country Risk:

Is the country where the buyer is located politically and economically sound? Could something happen in the buyer’s country that would prohibit or disrupt the buyer’s ability to pay the exporter for goods shipped to them?

 

Buyer Risk:

Can the buyer pay for goods shipped to them? Should an exporter extend credit to the buyer? Is the buyer financially sound and will they be able to make their payments when due? What are the buyer’s bona fides, particularly if the exporter is appointing them as an agent or distributor?

 

Credit:

Will the market expect credit terms? How should an exporter manage the credit risk of each buyer? How can an exporter reduce or eliminate their credit risks?

 

Damage to goods in transit:

What happens if the goods are damaged in transit and which party will be responsible?

 

Payment:

How can the exporter ensure that payment is received for the goods they ship overseas? What payment options can reduce an exporter’s risks?

 

Finance:

How can the exporter finance their sales contracts? How can the pre- and post – shipment periods be financed?

What are the risks facing importers?

A. Assessing risk for an importer.
Importing can be a risky business.
Importers encounter risk in some key areas and may need to consider the following questions:
Supplier:
Are they bona fide? Can they supply what is needed when it’s needed?
Have they the financial resources to deliver the order?
Supplier’s Country:
Is the country where the supplier is located economically sound and politically stable? Could something happen in the supplier’s country that might disrupt the supply of goods?
Quality of goods:
Is it possible to ensure that the quality of the goods meets the required standards?
Damage to goods in transit:
What happens if the goods are damaged in transit and which party will be responsible?
Credit:
Will the supplier grant credit? Can the supplier be encouraged to grant credit? How can the importer improve his credit standing with the supplier?
Payment:
How and when will payment be made? How can the importer ensure that payment is only made for goods ordered and shipped/received?
Finance:
How can the importer finance the purchase, particularly if payment is to be made at the time of shipment or receipt, before the goods can be resold or used to create finished goods for sale?

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