Companies that uphold exporting have to be skillful with their approach as they embrace huge risks. These companies have to follow the requirements and have to be committed to their export operations.
If you are intending to extend your export credit, here is a watch over on how export credit agencies work, risks covered by exporters and ways to mitigate them.
EXPORT CREDIT AGENCIES:
Export credit agencies (ECA) can be referred as intermediaries mediating between a nation’s government and the exporters. There are about 85 export credit agencies approximately around the world. ECAs comprise of financial institutions supporting international export activities by funding domiciliary companies. These agencies are also known as investment insurance agencies, could be private or quasi-governmental institutions.
ECAs promote international trade in the form of crediting insurance and guarantee arrangements or both, often referred as “pure cover” which depends on the directions provided to ECA. Shifting risks by the virtue of premiums from the corporations, they tend to encourage foreign trade by promoting investments in areas where corporations fail.
These agencies often involve in a few risks that are sustained by the supporting country’s government. Large risks, other than any normal transactions, will be inspected by a committee of government or authorised officials.
ECA adopts three methods to funds-
Direct funding- This is the basic structure where the loan is customized for the purchase of goods and services in the arranging country.
Financial intermediary- This involves a financial intermediary that lends to the importing entity.
Interest rate Equalization- A commercial money monger grants loans less than the market rates. Later, he is secured with the difference amount between the market rate and the commercial rate.
Export credit agencies limit their risks by not funding to risky countries. In case of non-compliance with the provisions described in the policy, claims on the losses of uncovered portions may be refused.
“By using ECAs, exporters can sell on more liberal terms than cash in advance policies, and still have a high degree of certainty that they will get paid.”
-World’s Export Credit Agencies”,written by- William A. Delphos provides this insight,
RISKS INVOLVED IN EXPORT BUSINESS AND WAYS TO MITIGATE THEM:
The most common risk of all is the payment risk. This can occur when the customer dodges payments for operational reasons. The best way to secure this risk is by a well-written contract. It cannot be recovered with credit insurance.
Even after the beneficiary satisfying the terms and conditions, there can be risks of defaults on payments by the issuing bank. Hence, the exporter is issued with confirmation of Letter of Credit that assures his payments.
Bad debts disturb profitability and can adversely affect the payments in international trade. Therefore, to mitigate this, it is always expected to keep alternatives like confirmation of LC, credit insurance or debt purchase (factoring without recourse of forfeiting).
The banks would have formerly advanced the funds in the debt purchase transaction, where it is without recourse. Here, the banks or the financial institutions take the risk of nonpayment.
The exporter has to be very sure dealing with creditworthiness of the foreign buyer, predominantly because international business covers large distances and unusual environments. If the creditworthiness is unknown, there are high risks of non-payments or fraud involved. To soften the process, you can aid from a few commercial firms in assisting on credit-checking and secure payment methods such as an irrevocable documentary credit.
In the course of shipment, there can be theft, damage or non-arrival of goods. It is very important for the exporter to understand the transportation and logistic risks in particular the “contract of carriage”. It is always better to request pre-shipment inspection to secure both importers and exporters interest. There can be chances of rejecting the arrived shipment and non-payment due to poor quality.
The exporter should be aware of the legal formalities of the contract as international laws and regulation change frequently and are enforced differently from the exporter’s country. The exporter’s interest can be secured by covering all legal and political risks.
International business embraces two different currencies, changes in exchange rates has negative impacts on both the factors and one of the factors will derive benefit ultimately. To overcome this, it is optimum to quote in one’s very own currency and hedge through the purchase of “forward exchange rate” contracts.
There can be a few countries with constraints upon their foreign currency reserves while they are advanced towards more open markets. In such cases, there can be non-payment to the exporter due to non-sufficient foreign exchange for payments by the Reserve or Central bank of the importing country.
If the banks are not solvent, then they can not meet their financial commitments. In such cases, transactions pertaining to cash against LC and guarantees may not be honored, which can contribute to outstandings.
Loss might be faced by the exporter if there are any occurrences of natural disaster or unexpected terrorist actions destroying export market for a company. These are some of the unforeseen risks that exporters should be aware of. In any international contract, it is necessary to ensure that the force majeure clause is included