You have decided to start exporting or, to accelerate your current exporting programme. Now is the time to assess and understand the risks in trading with buyers in the countries you have pinpointed, because these risks vary from country to country.
To quote the often repeated phrase, a sale is not a sale – goods or services – until you receive payment. So let’s start by looking at buyer and country risk and the resources you have at your disposal to collect or even go legal in the event of non-payment.
Also, how are you going to finance transactions? When extending open account credit terms how will overseas trading impact on cashflow? Have you considered the impact of incurring a bad debt?
Speaking of which, let’s look briefly at the impact of a bad debt of $100,000. With net margins of 10% you would need to generate a staggering $1,000,000 of non-risk sales to replace this loss. A sobering thought!
This points firmly to the need to know your buyers beyond their contact details and peripheral financial information. To illustrate this point, let’s take a country like Russia. What sort of reliable and established financial information or other supporting information is available from a third-party information provider? Information you can use to confidently and accurately assess a commercial risk before offering credit terms or deciding not to. Unfortunately, the cost of obtaining company reports for a Russian company is expensive and the quality of the information is generally dated and limited. It could simply confirm the company’s name and address and the date it was incorporated. This thin layer of information is not dissimilar to that available in many emerging countries and simply not good enough to make a commercial risk decision.
Next in line is assessing the political risk.
This must be based on current data and not simply on what is available in the public domain because invariably this does not accurately reflect the current political risk position. For example, underwriters may be notified of several late payments; the reason why the company is approaching alternative suppliers or, the political risk position has changed since goods were despatched.
If the commercial and political risks are sufficiently acceptable to move to the next stage it’s time to consider the impact of trading overseas on working capital.
To support increased export sales you may recognise the need to raise additional working capital. You approach your bank for support. However your bank manager decides that the risk is too high and says no to this funding.
You decide that you have sufficient headroom in your existing funding facility to finance export sales. You have ticked the boxes for commercial and political risks. It’s time now to ensure that your current terms of trade apply when trading with a company in Russia. You must be confident without any doubt that these terms of trade are enforceable in the event of non-payment, a dispute or the need to go legal.
You decide to trade and a buyer becomes a debtor.
You must now use a third-party collection provider; perhaps even go legal. The company and solicitor you use in the UK have neither the experience nor the resources to collect in Russia. And it’s too expensive and protracted for them to outsource to a third party.
With no choice you have to instruct another specialist third party and in doing so you incur additional costs without any guarantee of a recovery.
Given these many real and complex challenges it is little wonder that so many UK companies decide not to export. But in making this decision they lose out on additional sales growth and profit.
However with the right Export Trade Credit Insurance cover in place these very same companies can benefit from the protection, insight and support that will reduce these many challenges to support export sales.
Many businesses worldwide use Export Trade Credit Insurance as the key that unlocks their export potential.
Many of the leading underwriters have invested in risk offices around the world. This means they are well placed to understand at a granular level the local trading patterns, the culture, and the political risks. They can source up to date local financial information as well as current payment performance data. Their risk assessment also factors the financial position of the group parent which may be based in another country.
This information access and information gathering is completed as a precursor to offering your company what is in essence bespoke Trade Credit Insurance. Cover that ticks the risk boxes and unlocks your export potential.
In a nutshell, as the insured you are outsourcing the risk assessment to the Trade Credit Underwriter and crucially, in the event of a bad debt, where cover has previously been approved a claim of circa 90% of the insured value will be paid.
Your cash can continue to flow…
Not only that, many underwriters will indemnify the costs (typically at 90% ) of collection and legal action or even use their in-house team on your behalf.
The Trade Credit Insurance Policy can also be assigned to a financial institution to provide a layer of comfort to support overseas trade funding where previously the funding was declined.
What is the cost of Export Trade Credit Insurance Protection?
Typically, underwriters charge a premium expressed as a percentage of the insured turnover. This is based on the overall debt risk profile, historic bad debts, amounts being insured, and country risk spread.
For example, for a company with insured export sales of £2 million with an acceptable overall debtor risk spread and historic bad debts, the annual premium would be circa £8,500 (£708.33 per month).
Peace of mind for a pretty modest premium when you consider the amounts covered and the protection on offer in the event of a bad debt.
Talk to us!
Whilst Export Trade Credit Insurance is a class of insurance that protects you against the impact of incurring insured bad debts, we at EFCIS are of the firm opinion that it also provides the comfort and support that is needed to trade overseas with increased knowledge, confidence and payment certainty.
So, if overseas growth is on your agenda please contact us for a quotation or a complimentary pre-risk assessment on your top 10 companies.
Written and Published by Andrew William Moylan, Founder of The Export Hub