The Changing Face of the Trade Credit Landscape – Managing Risk During International Expansion

  • Michael Feldwick, Head of UK at Tinubu Square

  • 17.11.2016 07:30 am
  • undisclosed

We are in uncertain times, again. Which means that exposure to trade credit risk is a concern for business leaders no matter how large or small the company. The aim is to maintain a balance between the opportunities of commerce and the dangers of a payment default or bad debt.  It doesn’t take much to upset that balance, as we can see from the atmosphere of doubt since the results of the EU Referendum in June were announced.

For companies who trade internationally, many of whom were just beginning to feel more confident about putting a toe into new territorial waters following the economic downturn, Brexit couldn’t have come at a worse time. The usual and considerable challenges of managing trade credit risk overseas and understanding local economic, political and cultural issues still exists. In addition, they also have to deal with the constantly shifting and highly political environment that will cloak British companies at least until our negotiations with the EU are settled, possibly beyond.

This situation not withstanding for the most enterprising organisations, it simply means that they employ even closer scrutiny of the risks and opportunities and greater adherence to corporate governance.  This will not stop them from expanding.

It is actually a good time to be venturing out and establishing new business networks overseas, because, apart from a select few countries, the risk of default has not significantly increased in the last year, so accurate risk assessments can be made. In Latin America, Africa and Asia for example, there are untapped opportunities for growth and an appetite to increase trading, but it’s important to remember a few golden rules.  Make sure you are capable of addressing that country’s specific market needs; understand their trading practices; aim to make close local partnerships and above all else be armed with reliable and up to date business intelligence.

To be effective, companies must look not just at the customer, but any other companies within the customer’s group, the regions they are located in, the markets in which they trade, the executive team and where ownership resides.

Traditionally organisations have made use of credit reference agencies for data on prospective customers, but this is not always current, so the security of a prospective customer’s debts can’t be accurately assessed at the moment a credit decision needs to be made and the full exposure to risk understood.

Getting Insured

In Europe, it’s common practice for companies to invest in trade credit insurance, and policies have been expanded to cover the needs of clients who trade internationally. But every territory has its own unique practices and processes and this demands a different approach from insurers, with policies designed specifically. This will result in a gradual reduction in the blanket policy approach and is something UK companies need to be aware of.

As part of this overhauling of the trade credit insurance sector, more emphasis is being given to the importance of software tools that deliver invaluable local market intelligence and insight on local buyers. These tools also encourage best practice, enhance processes and help to provide good governance, and this reaps dividends in the form of support from reinsurers. Instead of standard products, insurers can build tailor-made solutions and adopt a multi-niche, customer-centric strategy to boost policy growth.

What kind of intelligence?

Access to factual and up-to-date information allows both insurers and businesses to make good credit risk decisions. The added benefit for companies is that if they are already accessing real-time data on customers they will be more risk-aware, and therefore more ‘risk attractive’ – and subsequently a more interesting prospect for the insurer.

So what are software tools delivering? Fundamentally they can assess the credit status of existing and potential customers and are automated so that alerts are triggered as and when an event arises that may change that status or level of credit risk. They can also monitor all areas of a customer’s operation from their supply chain and credit history, to their clients and the factors that make them able to pay or likely to default on credit. This level of visibility into the immediate financial health of customers means companies can understand their own exposure to risk and assess their appetite for it.

Risk can be assessed on so many different levels, not just economic uncertainty or trading patterns but also the effects on markets of political and regional turmoil. So, the credit risk landscape is always vulnerable to rapid fluctuations. This doesn’t mean that overseas trading presents too high a risk or that UK companies can never improve their credit terms to overseas customers, it simply means that they need the best intelligence so they can see financial issues developing and reduce their exposure.  

An important part of managing this is to establish good customer relations. Credit managers who are unable to make clear decisions due to a lack of information, will also lack the confidence to continue trading with the customer and this could lead to a decline in growth.

The need for reliable, current information about customers is abundantly apparent. ‘On the ground’ intelligence makes the difference between a calculated and a reckless risk, and the best way to assess that is by using a software tool that synthesizes daily intelligence from global sources, and not just local.

Whatever the economic outlook brings over the next couple of years, CEO’s have a duty to their stakeholders, to ascertain the nature and extent of the risks they are willing to take in their export arrangements. Good governance and risk management are crucial and will be fully supported with the right intelligence tools. 

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