Risk and Reward – Michael Dennis, CBF

Risk and Reward

I attended a seminar recently.  One attendee suggested that export sales are often more trouble than they are worth.  She expressed frustration about the difficulties evaluating credit risk including the problems getting trade references and bank references, as well as the challenges often associated with collecting past due balances.

In my opinion, the opportunities that sales to foreign customers represent are so significant that most U.S. based creditor companies have no choice but to extend credit to foreign customers.  Why? For all of the following reasons:

  • Export sales can result in higher gross sales and higher net profits
  • Exporting allows companies to diversify their customer base and reduce their risk
  • Companies selling seasonal products may find demand higher in what is normally the low season by exporting
  • Products that have reached the maturity phase or even the decline phase in the domestic market can be introduced into a foreign market and begin the product life cycle all over
  • Companies with excess inventory or excess production capacity may be able to sell goods and maintain full employment and operate at full capacity without having to offer deep discounts to customers to do so

Yes, export open account sales can present significantly higher risk than domestic sales, and yes export credit sales require more specialized skills and expertise to manage but I believe the risk if properly managed by the credit department is more than offset by the rewards.

Michael Dennis, MBA, CBF, LCM

That’s my opinion.  What is yours?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

 

4 Replies to “Risk and Reward – Michael Dennis, CBF”

  1. Michael,

    Your reasons are all valid. Additionally, the credit risk of export sales can often be less than a domestic sale. It is very common to pay for goods via letter of credit. This still gives the customer terms yet you are assured of payment on the due date in the L/C. You can also insure your sales via export credit insurance. In those cases, for the cost of the insurance premium, your risk is limited to any deductible and the premium cost. Additionally, our government is pro-export and the Ex/Im Bank offers financing assistance that lowers the cost of the goods the exporter ships. If the relationship between companies is truly reciprocal, your import customer may be able to supply you with material you can sell domestically. If the sale is structured properly, the exporter may avoid some or all of the costs from impacting his bank line of credit.

  2. Hi Michael,

    It is wonderful to read your thoughts on export sales and international trade.

    Today we are living in a world that is connecting faster and shrinking by the minute. By this I mean that the world has become a global village and international trade is a reality. Companies will do well if they start to look at the world with the spectacles of globalization.

    International trade, like any business endeavor, has pros and cons. But the benefits are worth the costs. Many of the reasons you gave should motivate a company to look into the international arena. It is a way to diversify the company’s portfolio and to increase its market share and profitability.

    International trade might appear daunting, but with proper training, guidance, and the building of the company’s expertise, what is daunting will become tame and will prove beneficial. As the title conveys, if there is no risk, there is no high reward and no high return. Export sales and international trade are worth our effort to investigate.

  3. Thank you for your comment. I agree that many export sales are made on terms other than open account including Letter of Credit and while an LC does not guarantee payment, it is a very good option for some exporting companies.

  4. As we discussed, if and when we request Letters of Credit from customers including foreign customers, we require Standby letters of credit which dramtically reduce the documentation requirements required from the seller under a Documentary letter of credit.

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