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Export credit management - is it different?

When I first became involved in the export credit function many years ago, it was a relatively simple matter: Get a letter of credit. For the most part, the entire function revolved around getting a letter of credit and presenting it to the bank for payment after the goods were shipped. Sometimes, there would be immediate payment upon presentation of the documents; at other times, there would be dated drafts allowing for deferred payment. The currency was almost always the dollar, so there was little concern about currency risk. Communication to the customer was via telex or telephone, if we were able to get through. The only complicating factors were who would be the negotiating bank for the letter of credit and whether the dated drafts would be converted to banker's acceptances so we could facilitate immediate payment.

Since then, we have come a long way. No longer is it generally accepted that business will be done on a letter of credit. No longer do we deal exclusively in dollars. No longer do we communicate through telex and letters, and no longer are we afraid of the transaction because it crosses international boundaries. Today, much of our selling in the international market is merely an extension of our domestic procedures - only they take place across international borders. Routinely, export transactions are being done on open account terms, and communication with the customer is via fax, telephone and e-mail. But, there are differences.

Recognize Country Risk

The most difficult concept to understand in establishing international credit is to recognize that the first consideration is country or sovereign risk. All too often, we are confronted with the dilemma of a strong customer, many times a foreign subsidiary of a familiar name, which is in a country where we are uncomfortable extending the requested terms. There can be many reasons for this discomfort. There may be restricted foreign exchange, political unrest, an unstable banking system or excessively high inflation. We have found that the best way to overcome these obstacles internally is to educate, educate and re-educate everyone associated with international sales. Once we have taught the fundamentals, we find our decisions, although sometimes unpopular, are respected and supported.

Finding Credit Information

Having crossed the country or sovereign risk obstacle, we are now confronted with establishing customer credit. Although considerably easier today than it was years ago, customer credit investigations are not only time consuming but costly. Many of the credit reporting agencies are on-line, which allows for rapid access of credit information. Unfortunately, the information available is not always current or complete. This then requires an investigation which can take anywhere from a week to 30 days. Also, if you want to include bank information in your credit investigation, you will have to employ a domestic bank to contact the foreign bank for a reference. This is an expensive and time-consuming process as well, and much of the information you will receive will be of little value, other than merely to establish that there is a banking relationship.

Gathering trade reference information is a little easier. In many situations, the customer may be buying from domestic sources. This will allow for the normal credit reference check, either by telephone, fax or mail. Those customers not already established with domestic sources will take longer to investigate because reference information will come from foreign sources or suppliers. Using the fax machine in these situations will greatly speed this process. We have found an almost universal willingness of foreign suppliers to exchange credit information. It is important to ask what terms of sale are being offered. Many times you will find a wide diversity in terms because of the product being sold and industry standards.

The latest method of gathering information is on the Internet. There is a wealth of information that can be used to build country evaluations and customer files. A good starting point for this information is the NACM Florida web site at You can access multiple sources of information from this address.

Foreign Financial Statements - There Are Differences

Finally, the subject of financial information comes into the picture. This is probably the biggest difference we experience in the investigative process. First of all, foreign financial statements do not always look like the statements we receive domestically. The order in which assets and liabilities appear on the balance sheet is frequently different, and the remaining statement will be stated differently. The currency denomination will, in all probability, not be in dollars. This will suggest converting the figures to dollars so that some measure of consistency can be obtained. Remember, there is a big difference in the value of 1,000 marks and 1,000 lira, so converting to dollars will simplify the analysis process. Lastly, it is important to know which financial statement you are receiving from the customer. It is not uncommon for the customer to have two or three different statements, each for a different purpose.

This is only an overview of what takes place in an export credit decision. Other areas of concern are how the merchandise will be shipped, when the title transfers to the customer, what freight forwarder will be used, what law will govern the transaction, how documents are prepared, who will present the documents, how payment will be made and a myriad of other concerns. These must all be addressed before you are able to make a final decision.

My advice to anyone becoming involved in export credit is to contact your local NACM affiliate and participate in your local International Credit Executives (ICE) Group through FCIB. Join the Finance, Credit and International Business (FCIB) division of NACM and attend the regional meetings in your area and the national conference in the fall of the year. Also, contact your local Chamber of Commerce to learn if they have any programs dedicated to the promotion of exporting. Finally, through these associations, develop a network of credit and other professionals that have experience in exporting so that information can be exchanged and questions answered.

Export credit is not that different. It requires an understanding of the transaction, recognition that there are multiple additional decisions that must be made, such as country risk and currency translations, and a shift in thinking from how we normally approach credit to one that encompass the entire transaction from approval to payment. Understanding this process will make you a better credit professional in your domestic business as well.

Paul F. McIntosh, CCE, is director of credit of Collins & Aikman Products Company, Spindale, NC.
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Author:McIntosh, Paul F.
Publication:Business Credit
Date:Nov 1, 1996
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