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Risk Control. Extra notes – Chapter 13 – Shipper Process. Introduction. Risk control broadly aims to: prevent losses from occurring minimise the magnitude of loss, should the event occur
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Risk Control Extra notes – Chapter 13 – Shipper Process
Introduction • Risk control broadly aims to: • prevent losses from occurring • minimise the magnitude of loss, should the event occur • deal (physically) with the event while it is occurring, in an attempt to recover from the loss with the least possible economic consequence.
Introduction • Where Risk Financing makes for financial provision to fund or finance any physical loss, Risk Control selects practical ways to minimise the risk e.g. choosing advanced payment terms or doing business with a customer with a good credit rating.
Introduction • In dealing with risk control there are three areas of which two will be focused on to reduce the risk of an exporter namely: • Payment terms • Credit risk • Country risk
Methods of Payment in International Trade • A very important part of any business environment is getting paid for providing goods or services. • The fact is securing payment for an international transaction (known as export receivables) is much more difficult and complicated than securing payment on business done with other South African entities due to a number of extra factors that can influence the process.
Methods of Payment in International Trade • One of the main factors to influence this process is the level or potential risk that the exporter and the importer are willing to face between them. • There are a wide variety of risks that an exporter can face and this section will consider the payment risk
Methods of Payment in International Trade • Table 2 below illustrates the different payment options and the relative amount of risk to the exporter and the importer. • As can be seen, an open account is the best option / most secure / least amount of risk option for an importer. • On the other hand, the advanced payment option is the best option / most secure / least amount of risk option for an exporter.
Methods of Payment in International Trade • It is of the utmost importance that before the seller/exporter undertakes an export transaction that the seller assesses the potential financial risk inherent in the sale. • Once the seller has determined the risks that his or her company can afford, a method of payment is agreed upon between the buyer and seller.
Methods of Payment in International Trade • When considering which terms of payment to use in your sale, you should remember that every transaction involves two commodities: the product and the money. • The export market has intense competition and offering the buyer attractive payment terms (low transaction costs, deferred payment terms, lower interest rates) is essential to export success.
Main Factors Affecting Payment Terms • When considering which payment terms should be used, take into account: • Your own cash-flow situation, this would be used to decide the credit terms you are willing to give your customer. • The payment terms acceptable in your customer’s country, e.g. a Letter of Credit for Kenya and Open Account trading for Northern Europe.
Main Factors Affecting Payment Terms • The bank charges that are involved, particularly where small quantities of product are involved. Profit margins can quickly be eroded by bank charges. • The shelf-life of your product – it is best not to give a credit period longer than the life of your product. • What are your competitors offering – If they are trading in Open Account you would likely have to do the same to be competitive or to break into the market.
Payment Term Types • Open Account • Advance Payment • Bills for Collection / Documentary Collection / Documents against Acceptance • Letters of Credit (L/Cs) / Documentary Credits (DCs) • HOME WORK: Get two definitions of each payment term type and explain how it works
Customer Credit Risk • Before any business can be done, you have to have confidence in your business trading partner. • You want to know the company and do business with them in confidence. • The reasons for doing credit checking on customers are as follows: • Checking a company's identity, reliability, and financial soundness before agreeing to do business. • Once companies become trading partners, you have to continue monitoring them to avoid problems that could lead to non payment or supply failures.
There are also risks associated with your customers to which you are exporting. These are summarized below: • The identity of your customer – is he solvent, does he have a trading history, does he own the premises from which he is trading? • The Credit Rating of your customer – even in a low-risk country, customers may be a high risk to you. • Non-payment – make sure you take out Export Credit Insurance for added protection, even in low risk countries
Choosing the right payment method and credit checking your customers is a practical method to reduce the risk of doing business. • Risk Control is a prevention tool to minimise or prevent losses from occurring. Through practical implementation of this advice, safe and secure trading can be maintained.
