Free Online Course in International BusinessKnowledge StatementKnowledge of Commercial Risks of Late and/or Nonpayment from Overseas BuyersGoalThe goal of this material is to describe for you the commercial risks and the effect of late and/or nonpayment from overseas buyers.Learning ObjectivesYou will be able to• identify commercial risk. • identify the tenets of risk assessment. • identify the "Eight Cs" of credit risk assessment for the global seller. • identify the impact of nonpayment. IntroductionNow that you know what a credit report is and what kind of information might be included in a credit report, the next step is to perform a credit risk assessment. The principles of risk assessment are particularly critical for several reasons; but, most importantly, any extension of credit requires an analysis of a buyer requesting credit and a determination as to the level of risk associated with a buyer’s financial ability to pay a seller according to terms. The risk, specifically commercial risk, associated with an international market is very important. In dealing with global or international markets, the assessment of a buyer takes on another dimension, the dimension of being international, namely, the risk of selling and getting paid in a timely manner when a buyer is in a country different from a seller. Commercial risk in international markets refers to the same situation encountered in the domestic market, which is the risk of late/nonpayment by a (foreign) buyer or intermediary for goods shipped/services completed, resulting from • insolvency or bankruptcy of a buyer • a buyer’s failure to pay for goods/services per the due date of the agreed upon payment terms • a buyer’s failure or refusal to accept the goods that were shipped or the services provided as agreed in the contract.When performing a risk assessment, sellers must consider the implication of selling into the international market. A seller must take into account factors that exist in global transactions, but not in domestic sales. Such factors include changes in country governments, currency values, economic and cultural issues. Assessing political and economic risks and cultural issues of other countries is discussed in detail in Module 1, so here you will find highlighted only a few points in context with granting credit. The bottom line point is that risk assessment is important because the impact of nonpayment to a seller may result in cost of money and bad debt events. Tenets of Risk AssessmentThe tenet, or established fundamental belief, of risk assessment is that international credit managers must constantly attempt to gather as many facts as possible in order to make the best credit decision for their companies. Their challenge is to evaluate and quantify the risk factors associated with granting credit to a buyer. This task becomes more challenging when a buyer is from another country. In the previous lesson, five factors were presented to consider when assessing a credit report: credibility, cost, value, timeliness, and completeness. Although each influences the level of risk to some extent, credibility of the information is particularly important in a risk assessment. For example, how does an international credit manager differentiate between fact and opinion? Another challenge is the fact that many buyers, especially if they are private, will not or cannot provide the necessary tangible information to assist in the risk evaluation process. Company credit policies do not normally address the specifics of making the "best” credit decision. The credit procedures established by an exporter should include risk parameters. Risk parameters typically focus on clearly stating who is responsible for credit decisions, including the payment terms as well as the transaction value each person is empowered to make in a decision as to payment terms of sale to a buyer. The credit procedures might also include how much credit an individual or department can extend, the escalation or approval process to decline or increase customer credit lines, and specifics as to when and who determines if a customer credit decision may require collateral.
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