Doing business internationally has numerous benefits. However, concluding a sales contract with a foreign buyer and transporting your products across thousands of kilometres involves tremendous risk. For an exporter to take advantage of the benefits of international expansion, they need to maximise their opportunities while mitigating risk. Mitigating the risks of a particular export transaction could include negotiating the use of a suitable Incoterm®, selecting an appropriate mode of transport, taking out export credit insurance or taking out the right marine insurance cover. However, none of these does much to mitigate the risk of you not getting paid!
International Payment methods and the Risk of not being Paid
The payment method you and your buyer agree to heavily influences your risk of non-payment. However, while it may seem logical for an exporter to always opt for the payment method that offers them the greatest protection against international financial risk, the buyer’s preferences and the cost implications of certain payment methods may force an exporter to compromise. For example, in pursuit of an attractive once-off deal, an exporter agrees to use a payment method that exposes them to the risk of non-payment.
Using Export Credit Insurance to Mitigate the Risk of Non-Payment
Suppose an exporter agrees to any payment method other than cash in advance or a confirmed letter of credit. In that case, they are exposing themselves to the risk of non-payment for their goods and, therefore, should consider taking out export credit insurance. As we discussed in our previous article, export credit insurance is a branch of insurance that offers protection to exporters against the risk of non-payment by a foreign buyer in exchange for a premium payment. The insured, i.e., the exporter, pays regular premiums to the export credit insurer in exchange for protection against the risk of non-payment by their foreign buyer.
Your ability to manage financial risk and maximise opportunities heavily influences your international success. However, very few exporters know the full extent of the danger they face in the global market. Identifying and mitigating international financial risk can be a complex task. Thankfully, Trade Forward Southern Africa, in collaboration with the International Trade Institute of Southern Africa, has created a free and comprehensive online training course on various aspects of global trade, including identifying and mitigating international financial risk. In addition, modules provided include training on international finance, export credit insurance, foreign exchange rates, Letters of Credit, and Incoterms®. Click the links below to sign up for free and get started.
To sign up to the School of Export CLICK HERE.
If you already have a profile, CLICK HERE to login to begin the module.