7 Ways to manage credit risk and safeguard your global trade growth

21/10/2014

manage credit risk

manage credit riskMany analysts believe that the global economy is entering a period of strong new growth, especially in emerging markets.

Asia, for example, is now responsible for a third of the world’s GDP, while Africa has seven out of ten of the planet’s fastest-growing economies. And South America’s middle class is expanding by leaps and bounds.

For Canadian businesses seeking growth, such developments are very promising. At the same time, though, these new markets can be risky for the unprepared.

The single most serious hazard is not getting paid, for reasons that can range from a customer’s bankruptcy to a government’s imposition of currency controls.

Make sure you get paid during international trade

Your first line of defence against this danger is to effectively manage credit risk.

If you’re clearly aware of your foreign customers’ creditworthiness, as well as local political and economic conditions that may affect their ability to pay, protecting your receivables will be a lot easier.

Here are seven basic ways to lower the risk of not getting your money.

1. Thoroughly check a new customer’s credit record.

Finding foreign corporate information can be tricky, especially for emerging markets. Local consulting firms may be able to help, and you can also get assistance from the Canadian Trade Commissioner Service office.

2. Use that first sale to start building the customer relationship.

Your number-one tool for managing a customer’s credit risk is building a long-term, trusted relationship.

This can obviously take years to fully achieve. But start laying the groundwork by discussing your credit terms with a new customer before you extend credit. This will help you gauge the customer’s attitudes to credit, and ensure that they clearly understand what you expect of them.

Also consider using a “master sales agreement” with a new customer, rather than relying on purchase orders to set out credit terms.

3. Establish credit limits.

To set a credit limit for a new customer, you can use tools such as:

  • Credit-agency reports, which can provide comprehensive information about a company’s financial history.
  • Bank reports, which should give details of the bank’s relationship with the company, the company’s borrowing capacity and its level of debt.
  • Audited financial statements, which can provide a good view of the business’s liquidity, profitability and cash flow.

4. Make sure the credit terms of your sales agreements are clear.

A sales agreement that includes well-worded, comprehensive terms of credit will minimize the risk of disputes and improve your chances of getting paid in full and on time.

5. Use credit and/or political risk insurance.

The Receivables Insurance Association of Canada provides useful information about insuring your company against non-payment.

If you decide to insure, EDC offers a full suite of insurance products that can protect you against non-payment, contract cancellation, breach of contract, expropriation, currency restrictions, political violence and more.

Titan Building nails down its receivables

Ottawa-based Titan Building Products manufactures deck-building components and materials, which it sells in Canada and abroad. A brush with a non-paying customer, however, cost company president Richard Bergman some sleepless nights.

As a result, Titan now takes customer deposits upfront and insures the remainder of the sale with EDC credit insurance. It’s a very flexible solution because the company can insure only those sales that might involve extra risk.

Moreover, says Bergman, “for a small business like Titan, the insurance fee is very cost-effective.

6. Use factoring.

To do this, you sell your receivable to a factoring company for its cash value, minus a discount. This gives you your money immediately because you don’t have to wait for payment—the customer will pay the factoring company instead of you.

But make sure the factoring is on a “non-recourse” basis, which means you’re not liable if the customer defaults.

7. Develop a standard process for handling overdue accounts.

Your chances of collecting on a delinquent account are highest in the first 90 days after the due date.

If you have an established routine for dealing with late accounts, you can start the collection process as soon as you know there’s a problem.

How does your company manage credit risk and safeguard against non-payment? If you have other tips, share them with us below!

Want to learn more about how to manage credit risk? Watch a video featuring my colleague Dominique Bergevin and myself. Or download EDC’s white paper on Dealing with Credit Risk.

 Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Mélanie Carter

Author: Mélanie Carter

Knowledge Partnerships Lead, Export Development Canada

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