Managing trade credit and insurance in the context of international commerce expansion
By Mike Feldwick,Head of UK & Ireland at Tinubu Square
Trade credit risk exposure is a top concern for CEO’s and CFO’s, understandably, since it is estimated that customer debts often represent more than a third of company assets. For organisations who already trade internationally, or plan to do so, there is the additional challenge of understanding local economic, political and cultural issues that can impact on a company’s finances and credit decisions.
Because payment defaults are felt throughout every level of an organisation, any additional exposure to risk is increasingly being put under intense scrutiny by stakeholders. They expect tighter governance to be applied to credit management and risk mitigation particularly if the company is broadening its geographical horizons. This is particularly appropriate in the wake of the European Referendum result in June, which has already had an impact on exchange rates and fluctuating confidence.
There is nothing more certain about the global market than the fact that it constantly shifts in terms of both risks and opportunities. Whether companies have their eye on Latin America, Africa, Asia or other parts of Europe, credit managers are under pressure to arm themselves with real-time, industry specific and local intelligence about prospective and existing customers. To be effective, they have to 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.
Added to this is the importance of real-time intelligence. Companies have used credit reference agencies for data on prospective customers, but if it’s not current, then it won’t help to assess the security of their debts right now when a credit decision needs to be made and the full exposure to risk must be understood.
Turning to insurance –
To protect themselves, some companies turn to trade credit insurance, particularly within Europe, where it is common business practice. In fact, European insurers dominate the international trade credit insurance landscape and over time have reworked existing policies to protect clients who trade internationally. This domination, however, is likely to change as important geographies, such as North America, the Far East, Latin America, India and large swathes of Asia offer huge opportunities for market penetration. As trade in these areas increases and ambition amongst exporters grows, there will be an increasing demand for credit insurance, but a blanket policy approach will not be sufficient, any more than it is for UK-based exporters.
The established insurers, recognising the need to evolve, are overhauling their services to customers, but at the same time, new companies are emerging, and both are increasingly using tools that enable them to tap into invaluable local market intelligence and insight on local buyers. This is particularly true in emerging markets or territories with low credit insurance penetration. These tools also prompt 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.
Being risk attractive –
Clearly the more information that insurers and businesses have, the more likely they are to make good credit risk decisions. In addition, if an insurer knows that their client is already accessing real-time data on its customers in order to be more risk-aware, it also becomes considerably more ‘risk attractive’ – a more interesting prospect for the insurer.
So what kind of information are businesses getting through software tools? At the very least they can see the credit status of existing and potential customers, not just on a monthly or weekly basis but automated so that alerts are triggered as and when an event arises. Software programs can track every aspect of a customer’s business from their supply chain and their credit history, to their clients and the factors that make them able to pay or likely to default on credit. Visibility into the immediate financial health of customers allows companies to understand their own exposure to risk and assess whether they have the appetite for it.
While we cautiously welcome green fiscal shoots, many parts of the world are experiencing a level of economic uncertainty,or their markets are being badly affected by evolving political or regional turmoil, which makes the credit risk landscape even more difficult to understand and vulnerable to rapid fluctuations.
Businesses, and their insurers, could be blindsided, seeing what appears to be an increase in trade and improve their credit terms overseas, when the reality is that suppliers with better intelligence can see financial issues developing and reduce their exposure. It would not be wise to be the business still holding the majority risk.This also has a knock-on effect in terms of 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 ultimately could see a decline in growth.
The need for credible, up-to-date information about customers is abundantly apparent, and particularly when trading overseas. Without the ability to determine the credit risk of companies operating in unfamiliar areas based on “on the ground” intelligence, an accurate picture cannot be constructed. Increasingly the most effective way to do this is by using a software tool that synthesizes daily intelligence from global sources, and not just local.
Businesses also have a duty to their stakeholders, from board members through to employees, and of course their own suppliers and insurers,to determine the nature and extent of the risks they are willing to take in their export arrangements. Risk management and good governance therefore are essential, and can be efficiently managed with the right intelligence tools in place.