Buyer risk for exporters
Buyer risk is an assessment that allows you to determine if your goods or services are being sold in the right market and if you will be paid for them. It is one of the most significant risks an exporter has to think about when doing business internationally. Fortunately there are a number of mechanisms you can employ to ensure that a sale becomes money in the bank.
Market research
Proper investigation into an overseas market should be foremost in your mind when considering a sale. Many exporters start selling overseas by accident, that is, someone makes a request to start a trade relationship. It is when a sale is reactive that exporters tend to get complacent because often, if a buyer is keen to purchase your goods or services, they will be more likely to accept payment terms favourable to you. This is fine for one-off opportunities, but it is not exporting.
Exporting is a long-term process, so you still need to do you due diligence to ensure that that country is the right fit as an ongoing part of your business. “It makes quite a difference whether you go into certain developed markets or emerging markets and whether a political risk applies or does not apply,” says Christian Vollbehr, country manager at global credit insurer Coface Australia.
Country credit ratings then come into play. Organisations like government credit agency the Export Finance & Insurance Corporation (EFIC) monitor country risk on various factors ranging from political risk to currency risk and difficulty enforcing contracts. Commercial agencies such as Coface monitor the business environment using macroeconomic information from a country’s economic data, and microeconomic data.“We track non-payments under our insurance-related products. Every time we receive a non-payment notification, our department of economics is kept in the loop and they evaluate the performance of each country, broken down by sector,” explains Vollbehr.
Understand your buyer
Credit ratings can extend so far as to encompass the business environment, the conditions for operating a business. Vollbehr says this allows exporters to understand “how hard it is for your counterparty to operate a business”.
Stephen Holden, general manager of Working Capital Finance at the Commonwealth Bank agrees and recommends finding out what is normal domestic practice: “Otherwise a buyer could say, ‘this is normal in my country’ and you wouldn’t know whether it is or not.” Vollbehr says this is a crucial point as terms of trade from country to country, and from industry to industry.
Both you and the buyer must also agree on the Incoterms in your contract “so you know exactly what both parties are trying to achieve and the buyer less likely to take you for a ride,” he says. Your research should include the buyer’s trading history, he adds: “If they’ve been importing a long time, they have a reputation to risk if they don’t pay you.”
Don’t forget word-of-mouth either, reminds Holden. “Never underestimate the informal exporters club. The sharing of information in a non-competitive way can be very useful. Talk to people.”
He also suggests using credit reference agencies to attain a credit report on the potential buyer. Vollbehr says agencies like Coface provide credit opinions on companies in about 180 countries, supported by credit insurance if required.
Monitoring a buyer is also paramount. “Stay very close to the first transactions before you establish a routine,” says Vollbehr. “Have sample trades or test trades where both parties have an agreement beside the commercial contract. The buyer can confirm that that’s the widget they want for the next shipment in a larger quantity.”
Things can also change over the course of a payment period, which in international business can often be 180 days long. “Something that is good credit today could be very different tomorrow. That might not just be the business environment in one country, that may also be related to changes in the political environment,” he says.
Got something to say? Join the export forum here at DynamicExport.com.au.
