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International Credit Risk

Tips and Tools to Save You Time and Money

In a global marketplace, exporters must walk a tightrope—balancing the need to offer competitive terms with the need to get paid in a timely manner. 

Direct international produce sales are not protected under the U.S. Department of Agriculture (USDA) Perishable Agricultural Commodities Act (PACA). This article focuses on options available to reduce credit risk when selling produce overseas.

Methods of Payment
“Mitigating 100 percent of the risk is impossible,” says Tony Buak, vice president of export sales for Columbia Marketing International, Inc., which exports to 57 countries. His company secures transactions several ways, each carrying various levels of risk. Whether it is cash in advance, an open account with terms, documentary collection, or letter of credit depends on whether the client is new or an established customer, as well as the importing country’s political and economic climate. Direct sales represent 60 percent of Buak’s business; the balance is through U.S.-based exporters to ensure PACA protection.

Cash in Advance
From an exporter’s perspective, the most advantageous method of payment, of course, is to get paid in advance—particularly when dealing with a new or financially shaky customer. This type of transaction forces the buyer to bear all risk, and payment is usually made via wire transfer. Increasingly popular, however, are international automated clearing house (ACH) transactions, which are similar to wire transfers but less costly.

Where a wire transfer is processed in real time, ACH transfers are batch processed. Within the United States, ACH funds are available the next business day; international transactions may not be. “The challenge,” explains Tom Beube, director of international sales at Wintrust Financial Corporation, headquartered in Rosemont, IL, “is that you’re dealing with different jurisdictions and laws.” There is no common rule set or payment format, and settlement times and holiday schedules vary by country.

Los Angeles-based Autenrieth Company is an export brokerage firm with a high volume of trade with New Zealand, Australia, and Southeast Asia. Brian Autenreith, vice president, says company policy dictates upfront payment from international clients. While the practice certainly limits liability, he acknowledges it can also limit his customer base—but he would rather not take the risk. “We are a small family company and have developed long-term relationships with our customers,” Autenrieth says, adding the company’s reputation for delivering high quality produce has customers accepting terms to pay up front. Those that won’t are turned away.

Autenrieth also believes risk mitigation tools, like letters of credit (L/C) and credit insurance, drive up costs and “can make the difference between my customer buying from us, another competitor, or another country altogether.” He believes exporters should concentrate on the long run—not just the current year or a particular commodity. Bottom line, it’s quite simple: “If my customer isn’t making money, he won’t do business with me anymore.”

Open Account (Unsecured)
Many importers press for open account transactions with payment up to 30 to 60 days after delivery. In this scenario, all risk is borne by the seller. Open account transactions should be used only between parties where a solid relationship exists and there is no significant political or currency risk to the importing country.