Organisations wanting to take advantage of business opportunities overseas need to find a way to make reliable credit risk decisions in an unfamiliar context. This can present challenges, particularly at a time when there is still financial uncertainty in many European nations.
“The need for credible, up-to-date information about customers is very apparent”
Further afield in Africa, Asia and the Middle East, the economic landscape has to be taken into consideration alongside other issues relating to politics and cultural differences. “Managing credit risk effectively is not just about looking at a particular client, but the companies within the group, the regions they are located in, the markets in which they trade, the executive management team and ultimately where ownership resides,” Gary Grant, group credit manager at Computers Unlimited commented. “This is particularly so for overseas trading. There’s now a constant shifting when you consider the risks that businesses engage in both politically and economically. Globally regions are more interconnected with regards to exposure to risk which must be assessed.”
Companies trading overseas need to be particularly alert to alterations in the credit status of existing and potential customers, not just on a monthly, weekly, or even daily basis, but in real-time. Credit managers would benefit from tools that can track every aspect of a customer’s business from the supply chain and credit history, to 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 any exposure to risk and assess whether an have the appetite for it.
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Whilst it would always be advisable to be cautious whether trading here in the UK or abroad, currently it is vital. Large parts of the world are in uncertain economic times or their markets are badly affected by evolving political or regional turmoil, which makes the credit risk landscape even more indefinite and vulnerable to rapid fluctuations.
“It is prudent to watch the Eurozone,” Grant added. “One could easily be blindsided, seeing an apparent increase in trade and improve credit terms for a growing business, when the reality is suppliers with better intelligence are aware of issues and have reduced their exposure, leaving you holding the majority risk. It can be difficult to reach reliable decisions, particularly if sufficient credible information is unavailable. This can result in a lack of confidence to continue trading with a customer or in a territory on the same terms and with the same levels of risk exposure, ultimately stagnating growth.”
The need for credible, up-to-date information about customers is very apparent, and never more so than when trading overseas. It is crucial to determine the credit risk of companies operating in unfamiliar areas based on “on the ground” intelligence, so that an accurate picture can be built. The best way to do this is by using a software tool that synthesiszes daily intelligence from global sources, and not just local.
Businesses also have a duty to their stakeholders, from directors and shareholders through to employees to determine the nature and extent of the risks they are willing to take in their export arrangements, so sound risk management and internal control systems need to be working efficiently. With the appropriate trade credit management and intelligence tools in place, companies are well positioned to demonstrate governance and a strong sense of responsibility.
“It is important that credit managers keep an ear to the ground, understand not just the customer, but the customer’s customer; how they manage their operations; where they intend to be in five years’ time and more broadly the risks attached to the markets they are currently involved in and those they are targeting in the future,” said Grant. “Increasingly I believe that we will continue to rely on credible intelligence and software solutions to optimise the credit/risk function and positively impact the bottom line. A good trading relationship with a customer is great, but is always best if presented with reliable data and analytical intelligence, which can therefore tell the full story.”
Mike Feldwick is head of UK & Ireland at Tinubu Square.
Founded in 2000, Tinubu Square is the leading expert in trade credit risk management. Tinubu enables organisations across the world to significantly reduce their exposure to risk, and their financial, operational and technical costs with best-in-class technology solutions and services.
Tinubu Square provides IT solutions and services to different businesses including multinational corporations, credit insurers and receivables financing organisations.