Buyer risk for exporters
Establish payment terms
The safest form of selling is to ask for cash upfront. If your product or service is in enough demand, this may be feasible, however most exporters will need to offer more flexible payment terms to be competitive in a global market. The most competitive payment method is to offer an open account where you send the goods and remain confident that the buyer will pay you; this is the most risky and usually for well established trading partners.
Somewhere in between is the documentary system, administered by banks. A simple documentary letter of credit is where your buyer requests their bank to pay you on presentation of the correct documents showing that the right quantity of the right goods have been delivered in accordance with the buying agreement. If you are uncertain about the stability of the buyer’s bank, you can have your Australian bank effectively guarantee payment, explains Holden: “That gives you a degree of comfort that everything agreed upon in the original contract has been looked at by trade professionals in your bank and the importer’s bank. You’re not in the business of analysing banks.” If your bank is unwilling to take the risk on your buyer’s bank for payments under a documentary credit, EFIC can provide a guarantee to your bank and assume the credit risk.
Sometimes the buyer is not in a position to provide satisfactory collateral with their bank, which is where buyer finance, via a direct loan or a guarantee, comes in. EFIC either lends funds to your overseas buyer or a bank lends funds to your buyer and EFIC provides a guarantee for the buyer’s payment obligations. The exporter benefits because the buyer can afford to buy from them, and may even be allowed an advance of the loan funds as export contract payments.
The documentary system is renowned for its paperwork, though Holden argues that it’s worth it. “If you go through a letter of credit process, you have a contract, insurance, shipping documents—paperwork you should be doing correctly anyway,” he says. “You’re in the business of making a good and selling it, so anything you can do to take buyer risk out of your consideration will allow you to do what you do best.”
Buyer risk strategies
If you’re not confident that your payment terms adequately cover your buyer risk, there are other mitigation strategies you can add to the mix. Receivables financing, under which facilities like factoring and invoice discounting fall, is a popular way for exporters to control their cash flow. This involves the financial provider giving the exporter the money owed on an invoice, usually up to 85 percent of its value, upfront instead of the exporter having to wait for the full term of the invoice, which could be several months.
If you have a recourse facility, at the end of the payment term you need to pay back the money given to you by the provider. If the buyer defaults, you still own the risk. However, in a non-recourse facility, you pass on the risk to the provider, which effectively buys your debt. Needless to say, non-recourse facilities are more expensive and your buyer will usually be subject to credit checks by the provider.
Another way to pass on risk is to combine factoring and credit insurance, or just take out insurance. The benefit of insurance is that it runs in the background, “without you having to disclose it to the importer,” says Vollbehr. “Build the cost of an ancillary service into your margin without disclosing it to the importer who can then typically benefit from an open account transaction terms.”
He offers two points of advice: the first is to make sure the insurer has a presence in your destination market so it can “establish a sound credit opinion and provide assistance in case the deal goes sour”; the second is to ensure it can collect debt in the other country. “Collection businesses in other countries may not be legal. In the Middle East, for example, you need to know how to collect otherwise you have no chance, and you have to have someone in-country who knows how to do that,” he says.
When things go wrong
How much you stand to lose if things go wrong and a buyer hasn’t paid is determined by the combination of debt management and credit control you have exercised and whether you have managed to fund a “true transfer of risk to another carrier,” explains Vollbehr.
“If you have a letter of credit issued, the bank has taken on that risk,” says Holden. “If you do it on a collections basis there are international rules where you would have to go through the notification process. If you have insurance you go to your insurer.” Without any of these things in place, your last chance is the courts, and “depending on the jurisdiction, it can get complicated,” he says.
Vollbehr recommends inserting a clause for retention of title, which means if you have not been paid, you are still entitled to the product even if it has been sold to another party. The other ‘must’ is a strong credit management procedure understood and executed by your people, he advises.
The global downturn has had some good consequences, which is that exporters are more attentive of risk, Holden observes, with this final piece of advice: “Never chase exports with dollar signs in your eyes, it’s paper until you get money in the bank; bottom out the risk.”
—With John Johnston, Alan McInally and Kathrin Tebbutt of Coface
Information sources
Australian Export Handbook by the Australian Institute of Export (RRP $137.50; www.aiex.com.au)
Coface Country Risk & Economic Research: www.coface.com.au
EFIC World Risk Developments: www.efic.gov.au/country
International Trade Handbook 2010: Western Australia by the Chamber of Commerce and Industry Western Australia (RRP $38.50; www.cciwa.com)
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