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Cultural Issues Affecting International Trade/Assessment

Assessment
{As you develop your international business, your ability to collect payment in a timely manner can be affected by the -weather in the country. -contract that was signed. +culture of the country. -demand for the product that is sold.
 * type=""}

{Due to the unlimited variables that may affect an international business transaction, the most important foundation to establish is a -complete understanding of the legal system in which you will conduct business. -thorough understanding of the religions present in a country. -complete understanding of the language of a country. +strong relationship with your business associates abroad.
 * type=""}

{In a country where the level of corruption is very high, it is likely that an international manager will be required to pay +bribes (grease payments). -corporate taxes. -high duty rates. -high interest rates.
 * type=""}

{Cultural restrictions within a country may limit businesses -to selling a limited quantity of products during the year. +from utilizing financial and foreign exchange tools. -from completely understanding the legal system in which you will conduct business. -from thoroughly understanding the religions present in a country.
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Resources for Determining Risk/Regional Resources

Regional Resources
Search for the official government website and/or travel and tourism organization of the country you are researching. In many cases the text will be translated into a variety of languages.

Africa

 * Investment Guide for African Nations

Asia & Australia

 * Asia-Pacific Economic Cooperation (APEC)
 * Asian Business Watch
 * Asian Development Bank
 * Association of Southeast Asian Nations (ASEAN)
 * Australian Bureau of Statistics
 * China- Country Data
 * China- Economic & Commercial Office
 * Hong Kong Information
 * Hong Kong Trade Development Council
 * or www.jetro.go.jp Japanese External Trade Organization (JETRO)
 * Japanese Economic Information (Ministry of International Trade & Industry)
 * Culture and Communication Patterns in Korean Firms
 * Korea Trade-Investment Promotion Agency (KOTRA)
 * Middles East Studies (links to information on Middle Eastern Nations)
 * Singapore Demographics
 * Thailand
 * Vietnamese Business Journal

Europe

 * European Union
 * European Online
 * European Free Trade Area

North America

 * NAFTA
 * Canada
 * Mexico

U.S. Government

 * Department of Commerce
 * Foreign & Commercial Service
 * International Trade Administration
 * Import Administration
 * CIA World Factbook
 * Customs & Border Protection
 * Customs & Border Protection 2
 * Department of Labor
 * Department of State
 * Department of the Treasury
 * Internal Revenue Service
 * Export-Import Bank of the United States
 * Federal Trade Commission
 * U.S. Census
 * U.S. International Trade Commission
 * U.S. Trade Representatives
 * Overseas Private Investment Corp
 * Small Business Administration
 * International Office
 * Center for Trade & Investment
 * Security Exchange Commission

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Resources for Determining Risk/Publications

Publications

 * Body Language Around the World
 * Business Monitor
 * Businessweek
 * Euromoney
 * Financial Times
 * Forbes
 * Fortune
 * International Herald Tribune
 * Journal of Commerce
 * Asian Business News

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Resources for Determining Risk/World Organizations

World Organizations

 * Bank for International Settlements
 * Heritage Foundation
 * International Organization for Standardization (ISO)
 * International Chamber of Commerce
 * International Monetary Fund
 * Organization for Economic Cooperation and Development (OECD)
 * United Nations
 * UNESCO Economics Intelligence
 * World Trade Center Associations
 * World Bank

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Resources for Determining Risk/Credit Agencies

Credit Agencies

 * Coface North America
 * Credit Management Information & Support
 * Credit Reports Worldwide
 * Dun & Bradstreet
 * Experian
 * FCIB
 * Graydon America
 * Hoovers
 * Moody’s
 * SJ Rundt & Associates
 * Standard and Poor

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Resources for Determining Risk/Databases

Databases

 * Competitive Intelligence Guide
 * Kompass
 * Stat/USA/USA Trade Online
 * Trade Point
 * Trade Port
 * UN Comtrade
 * World Bank Trade Statistics
 * Competitive Intelligence Resources

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Resources for Determining Risk/Summary

Summary
As indicated there are more resources available on the internet than listed in the previous pages. We have included only the homepages to each of the references rather than highlighting specific articles or pages to avoid the problem of dead links. Please remember this list is by no means exhaustive. Start with your favorite search engine and search away. Be cautious however, you might end up in the black hole of cyber-knowledge and miss a few days of the week.

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Resources for Determining Risk/Resources

Resources
International business: The Challenge of Global Competition (7th ed.) Burr Ridge, IL: Irwin/Mcgraw-Hill.

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Resources for Determining Risk/Activities

Activity
Have each student select a different country. Direct each student to:

 * Identify the 10-15 top websites that publish political and economic data/risk for their country. For each site have them identify the web address and identify the type of information available, date of publication, and validity.

 * Select 1-2 world organizations, databases, &/or publications and find information about their country. For each site have them identify the web address and identify the type of information available, date of publication, and validity.

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Resources for Determining Risk/Assessment

Assessment
{It is essential to validate resources by cross referencing: -a reliable resource you have used in the past +multiple sources containing the same information -an official government website containing the same information -the latest news publication
 * type=""}

{The best place to find the most recent data is on: -printed publications from the current year -government statistic bureaus -international organization publications +websites that have been updated with in the last 30 days
 * type=""}

{The main source of information for foreign country statistics can be found at: -local newspaper sites -international organization sites +official government or travel/tourism sites -U.S. government sites
 * type=""}

{The U.S. Government agency that provides the most thorough international trade data and statistics is: +the Commerce Department -the State Department -the Treasury Department -the Department of Defense
 * type=""}

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Foreign Exchange Risk Mitigation Techniques/Types of Rates of Exchange

Fixed rate of exchange
A fixed rate of exchange is a ratio established by the government at which foreign currencies can be exchanged. The value of the national currency is based on parity with other currencies. Sustaining the parity is the question: if other factors force a market change to a floating rate, the impact could negatively impact the country.

Floating rate of exchange
A floating rate of exchange allows open market conditions to determine the value of the currency in relationship to other currencies. Open market exchange rates are highly volatile and change every 5 seconds or 18,000 times per day. Any given currency typically fluctuates 1% during a 24- hour period. The volatility of the market is influenced by political, economic and technical conditions that come into play and cause fluctuations that may exceed the typical movement. This volatility translates into the need to manage the risk of rising or falling exchange rates.

Managed rate of exchange
A managed rate of exchange allows a central bank to intervene to adjust for market conditions. It controls wide valuation swings that may occur due to adverse market conditions.

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Foreign Exchange Risk Mitigation Techniques/Market Drivers

Speculative Trading
Political, economic and technical events are the drivers of change in the foreign exchange markets. Having a broad understanding of these factors provides a practical means of forecasting foreign exchange rates. A forecast is static and not constant and therefore must be monitored and adjusted based on market conditions. Some key factors to consider are balance of payment, inflation rates, investor confidence and intervention in the foreign exchange market. Historically businesses purchased foreign currencies to settle trade-related transactions. Today there are many reasons to purchase foreign currencies. Investing in stock markets, the purchase of manufacturing facilities, holding the currency for interest income or speculation and the purchase of bonds are some of the ways investors utilize foreign currency. Markets are now impacted by market makers as they assume a high level of risk by buying and selling in sufficient quantities to affect market prices.

Balance of Payments
Payments that flow between one country and all other countries determine its balance of payments. It is defined as the sum of the current account, the capital account and the change in official reserves. A current account is considered more short-term in nature while the other two are more long-term.

Balance of Payments = Current Account + Capital Account + Change in Official Reserves

 * The current account is the net of all goods and services between the United States and all other countries. The current account is generally the most volatile.  The balance of trade between the United States and all other countries determines whether we are a net exporter or importer.  Our need for inexpensive goods over what we could buy locally has caused us to become a net importer with a growing trade deficit.  The deficit could be a severe problem if dollars were sold in mass quantities to the extent of lowering the value of the dollar itself.
 * The capital account is the purchase of our currency or the repatriation of our currency for direct foreign investment in stocks, capital goods, land, etc. Capital goods are holdings other than cash and have to be converted back to cash in order to remove them from the country.  This conversion process takes more time and is less volatile than having a current account.
 * Official reserves are the holdings by foreign governments in the US dollar. These reserves can be used to stabilize their currency by selling off the dollars and purchasing their local currency, creating an artificial demand and driving the price of their currency up.  The impact of this type of selling, which is generally short-term in nature, is done to prevent wide swings in the value of the local currency.

The balance of payments has a significant impact on the value of a currency. While movements in a current account have the biggest impact, they are often balanced by the other two. The United States tries to entice foreign investors to invest in capital goods; in doing so we repatriate some of the dollars back into our country. We also encourage governments to increase their reserves in the United States. The impact of making similar investments in dollars can offset the fluctuations in the current account. It is only when confidence in all three areas is lacking that the United States dollar will decline significantly.

Inflation Rates
Inflation causes the value of local goods to become more expensive, impacting the ability of other countries to buy local goods and services. It makes products less competitive in a free-market economy. Time combined with market conditions will cause the re-establishment of purchasing power parity between two countries.

Purchasing power parity (PPP), as defined by the Swedish economist G. Cassel in 1918, is that natural market conditions will adjust the exchange rates between the domestic currency and any foreign currency to reflect differences in the inflation rates between them, which means there is a direct correlation between the movement of inflation rates between two counties and their respective foreign exchange rates.

Investor Confidence
The typical foreign business model starts with the export of goods. The eventual success will lead to the establishment of a manufacturing plant with local production. Eventually competition, if unchecked, will force the manufacturing costs to go down so that the once- exporter starts importing goods he exported. The ability to follow this model is heavily dependent upon investor confidence. Foreign direct investment is dependent upon political stability, GDP (economic performance) and government deficits. Investors’ expectations are for higher returns with managed risk. Political stability is a key determinant of investor confidence. Civil strife in the form of strikes, riots or civil commotion and expropriations by governments discourage investor confidence and lower the value of a currency. High tax rates, high deficits and poor overall economic performance by a country contribute to poor investor confidence. Investment will return should investors believe that the country is in a recovery mode and these factors will change to their benefits.

Intervention
Trading in foreign exchange can be very risky. There are arbitrageurs that benefit from price differences based on time and place. Their ability to enter and exit the market quickly can create a temporary price differential. Their objective is to make quick profits; this form of derivative trading is considered the most risky. Governments use their ability to intervene in the market to prevent wide swings in their currency. Their ability to utilize their reserves to buy and sell their currency can stabilize the market temporarily providing time to adjust any other market conditions that impact the value of their currency. Governments also determine interest rates, thus creating an investment option that entices capital into the country. These tools are temporary in nature: in order to keep long-term capital in a country, there must be stability without political turmoil.

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Foreign Exchange Risk Mitigation Techniques/Measuring Foreign Exchange Exposure

Transaction Exposure
Transactions in the form of purchase contracts or agreements denominated in a foreign currency but not yet settled create transaction exposure. The fluctuation of the currency will have an impact on the value until the transaction is completed. The value of an unsettled export receivable or an import payable is just one example. There are multiple hedging techniques to help the investor minimize his risk, including:
 * forward contracts
 * futures contracts
 * use of a money market hedge
 * contractual risk sharing
 * pricing adjustments based on forward rates
 * foreign currency accounts
 * foreign currency options

Translation Exposure
The revaluation of all foreign-denominated assets and liabilities often referred to as transfer pricing is usually considered “paper” gains or losses. The conversion of an asset by selling it and converting the proceeds to the local currency would create a realized gain or loss. This form of exposure is created when financial statements are prepared and converted to the local currency of the owner or investor. This form of exposure is considered an indication of potential gains or losses.

Economic Exposure
The evaluation of foreign governments from an economic standpoint determines whether a translation exposure could be realized. The projected stability of a country, both politically and economically, impacts future cash flows and can adversely impact the profitability of an organization. Strategic planning for operations must include economic exposure.

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Foreign Exchange Risk Mitigation Techniques/Business Needs for Foreign Currency

Accounts Payable and Accounts Receivable
Companies purchase raw materials or component parts for the manufacturing of goods. When the transaction is conducted in a currency other than the local currency, risk increases. In order to control the cost of goods sold and reduce the risk, using some form of hedge is necessary.

Companies that buy and sell in a foreign currency will often use a netting effect. The company will maintain a foreign currency account to deposit funds from sales and to withdraw funds to pay for purchases. The repatriation of funds generally results in the form of profits which are converted and transferred to the home office periodically, thus taking advantage of favorable market conditions.

Interest rates vary widely from country to country. It often makes sense, depending on the cash position of the company, to take an equal and opposite foreign exchange exposure position to complete a transaction at maturity. The company could take out a loan in the amount of a receivable in the foreign currency, convert it to their local currency and use the proceeds from their receivable to pay off their loan. The company may also buy the foreign currency and place it on deposit with a bank to earn interest and use it to pay off the payable at maturity. This action will enable the company to fix the exchange rate and take advantage of favorable investment opportunities.

A buyer and seller may agree contractually to share the exposure risk. They can establish different parameters based on market conditions to control the risk. Parameters can include payment of goods in the local currency, the splitting of the payment in both the buyer’s and seller’s currency, or the inclusion of a price adjustment clause if the exchange rate changes substantially.

The most common means to control exposure risk is to engage in a forward contract either in the form of a purchase or sale of a currency. The forward contract establishes a fixed price to be paid at maturity on the date the contract is executed. The general requirement is a small security deposit to secure the completion of the trade at maturity. Thus the company fixes the price without using capital until the maturity of the contract. The fixing of the price of the foreign exchange contract also allows the company to make a decision today whether to proceed or not based on current rates. The company can then price the product for sale based on the actual cost of the components.

Balance Sheet Hedging
Foreign currency options protect against adverse foreign exchange fluctuations while benefiting from a positive movement in the exchange rate. The trader is provided with the right but not the obligation to buy (call option) or sell (put option) a specific amount of foreign currency at a fixed price within a set period. Protection is provided. If the rates are unfavorable to the trader, he will just exercise the option; should the rates be favorable to the trader, then there is no need to exercise the option. Because of its advantages, this process for a right to buy or sell can be expensive. It is generally used for large denominations. Contingent obligations resulting from long contract negotiations could make this an attractive means of controlling exposure risk.

Acquisition Activity
Acquisitions take time to conclude and are often in large denominations. The evaluation of an acquisition is difficult enough without the worry of foreign exchange rate fluctuations. Options provide a good hedge against rate fluctuations during the negotiation process.

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Foreign Exchange Risk Mitigation Techniques/Foreign Exchange Trading

Foreign Exchange Trading
The exchange of one currency for another currency, dollars (USD) for Japanese yen (JPY), is the basic definition of foreign exchange. There are two different types of quotations:

 * Indirect quotation - The price of a national currency expressed in terms of one unit of a foreign currency
 * Quoting Japanese yen at a rate of 110
 * 1 USD = 110.00 JPY
 * Direct quotation - The value of one unit of national currency in terms of the foreign currency
 * Quoting USD at a rate of .009091
 * 1 JPY = .009091 USD.

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Foreign Exchange Risk Mitigation Techniques/Common Instruments to Offset Risk

Spot
Spot trades are priced and executed on the spot based on the current market rate and are paid for immediately. Spot contracts are generally done verbally and considered binding. When executing a trade, an offer price is provided; if accepted, the contract is considered done. Delivery of the currency is generally two days forward; the two-day’s time is used for the bank to receive the currency it purchased and deliver the currency to the beneficiary as provided by the buyer.

Forwards
Forward contracts are priced by combining the current spot price with the forward points. Forward points are based on the differential in interest rates of the two countries. The discount or premium points, once determined, are combined with the spot rate to create the forward rate. Some currencies are not traded openly, but there is a non-deliverable currency market. By hedging with a non-deliverable forward, a purchaser can protect against rate fluctuations rather than settling a transaction at maturity using the exchange rate that is posted on that date. Settlement would be in the local currency to provide additional local funds to settle the transaction.

Swaps
Spot contracts are settled immediately while a forward contract has a fixed maturity and must be settled at maturity. Capital can be tied up when the need to deliver the currency has been delayed. Swaps provide an opportunity to exchange the foreign currency for the local currency for a fixed period of time and “swap” it back when it is needed.

Options
Options provide protection for large denominations by taking advantage of rate improvements while protecting against the negative impact of a rate change. Alternatives Countertrade forms can and are often used when a currency cannot be traded. Bartering is most commonly used, but other forms are counter purchase, advance purchase, buy backs and bilateral arrangements.

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Foreign Exchange Risk Mitigation Techniques/Summary

Summary
The fear of encountering foreign exchange fluctuations and exposing a company to risk is often the deciding factor for a company to stay out of the global market. When international managers understand the risk and the tools available to manage any potential risk, greater opportunities become available for the company. Entering the global market and being willing to deal in foreign currencies may lead to increased business opportunities.

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Foreign Exchange Risk Mitigation Techniques/Resources

Resources

 * The Global Entrepreneur, James Foley, 2nd Edition, Jamric Press, 2004.
 * International Trade Finance V4, Forum for International Trade Training (FITT), Ottawa, Canada, 2005.
 * International Business, 10th Edition, Ball-McCulloch-Frantz-Geringer-Minor, McGraw-Hill 2005.

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Foreign Exchange Risk Mitigation Techniques/Activities

Activities
Trade Negotiation Exercise The purpose of the exercise is to provide an opportunity to use exchange rates and barter for a product.

Task 1
Divide the students into groups. If possible each group should consist of 3-5 members (preferably 5 and no fewer than 3). Each group is given USD500,000.00. With this money they will buy from the list of products that are provided. Each product will be sold in a different currency. Once they have made their selections, they are provided with exchange rates to purchase their products. The exercise can be done in one session or over several sessions, but each task should be separated by one-week intervals to accommodate the use of forward rates. The students are also given one-week forward rates. They can choose to purchase at the spot rate or the forward rate. This exercise will provide them with the experience of doing conversions with actual market rates and evaluating various alternatives.

Rates and Products
Mexican peso (MXP) Oil: 1 barrel = MXP60.00 Must buy in lots of 100 barrels (MXP6,000.00 = 100 barrels)

Japanese yen (JPY) Electronic component parts: 1 part = JPY200 Must buy in lots of 1,000 (JPY200,000 = 1,000 parts)

Canadian dollar (CAD) Honey	: 1 barrel = CAD470.00 Must buy in lots of 60 (CAD28,200.00 = 60 barrels)

Australian dollar (AUD) Diamonds: 1 carat = AUD150.00 Must buy in lots of 100 (AUD15,000.00 = 100 carats)

European currency (EUR) Men’s shirts: 1 shirt = EUR15.00 Must buy in lots of 200 (EUR3,000.00 = 200 men’s shirts)

British pound (GBP) Leather belts: 1 belt = GBP5.00 Must buy in lots of 1,000 (GBP5,000.00 = 1,000 leather belts)

Task 2
Inform the students that they must swap out their currency for one more week because they are allowed to defer payment. Each group will be assigned a group number and asked to put on the board the products that they purchased so that the entire class knows what they own. Each group is given an advantage exclusive to their group only and instructed to barter from the other groups for the advantage product that they want to own. The students should be instructed not to share their advantage with any other group. This exercise will help them understand the use of swaps and bartering for goods.

Swap Rates
GROUP 1 - ADVANTAGE Your group will be able to sell all of the oil that you can acquire for 4 times the purchase price from week 1 (MXP6,000.00 = 100 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 2 - ADVANTAGE Your group will be able to sell all of the electronic component parts that you can acquire for 4 times the purchase price from week 1 (JPY200,000 = 1,000 component parts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 3 - ADVANTAGE Your group will be able to sell all of the honey that you can acquire for 4 times the purchase price from week 1 (CAD28,200.00 = 60 barrels). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 4 - ADVANTAGE Your group will be able to sell all of the diamonds that you can acquire for 4 times the purchase price from week 1 (AUD15,000.00 = 100 carats). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 5 - ADVANTAGE Your group will be able to sell all of the men’s shirts that you can acquire for 4 times the purchase price from week 1 (EUR3,000.00 = 200 men’s shirts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

GROUP 6 - ADVANTAGE Your group will be able to sell all of the leather belts that you can acquire for 4 times the purchase price from week 1 (GBP5,000.00 = 1,000 leather belts). No other group has this advantage! All other products that you own will produce only double the original purchase price.

Task 3
Have the groups complete their swaps and pay for their goods. The students will be instructed to sell all of their products as listed in their group advantage sheets from week 2. They must sell their goods in the currency in which they purchased the goods. Once they have completed this process, they will convert the foreign currency back to the US dollars and close their books to determine any profit or loss from the original $500,000.00.

Sell Exchange Rates
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Foreign Exchange Risk Mitigation Techniques/Assessment

Assessment
{When purchasing or selling foreign currency at a spot rate, what best describes your adverse (negative) foreign exchange risk? -the loss related to a change in foreign exchange regulations in the country +the loss due to an unexpected change in the country’s quoted FX rate -the loss due to the country’s inability to service its foreign debt -the loss due to the translation of your foreign assets held in that country
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{The current market conditions indicate that in the next 90 days the US dollar is expected to decline in value. The company is currently going through a very tight cash flow period and must monitor cash closely. The company has an outstanding foreign currency payable that is due for payment in the next 60 days. The current spot rate is favorable to cover the payable due in 60 days. Which of the following would you recommend based on the current condition of the company? -spot contract -foreign currency bank loan +forward contract -purchase the needed currency at the spot rate and place on deposit at a foreign bank until the payable is due
 * type=""}

{Which of the following best defines the balance of payments? +the sum of the current account, the capital account and the change in official reserves -the sum of all exports and imports of goods services and financial capital -the sum of the countries’ inflation rate and all net payments between the two countries -the sum of Gross Domestic Product (GDP) and the current country deficit
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{Which of the following is defined as allowing open market conditions to determine the value of the currency in relationship to others? -fixed rate of exchange -closed border convertibility -managed rate of exchange +floating rate of exchange
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{Companies that have operations overseas use transfer pricing to revalue their balance sheet creating a “paper” gain or loss. Which best describes this type of exposure? +translation exposure -political exposure -economic exposure -transaction exposure
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{Which of the following best describes a forward contract? -the purchase of a foreign currency on a future date with immediate delivery on that future date -the purchase of a foreign currency today with immediate payment and delivery +the purchase of a foreign currency today for a fixed price for delivery at a specific future date -the purchase of a foreign currency today for a variable price for delivery at a specific future date
 * type=""}

{Is it important to monitor foreign exchange positions on a continual basis? -No, because market rates do not change except in your favor. +Yes, because foreign exchange rates are constantly changing. -No, because all foreign exposure is automatically hedged by the free markets. -Yes, because the dollar is always weakening.
 * type=""}

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Sources of Credit Reports/Credit Report Components

A Credit Report and Its Components
Commercial credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time. A credit report is a tool used to convey whether an individual or company has any outstanding credit obligations and whether the payments for those lines of credit are current. Typically, credit reports are created by credit reporting agencies, like Dun & Bradstreet, for example. From a seller’s perspective, this is an external credit report. However, there are some instances when sellers or bankers need to create their own “credit reports.” Depending on the industry or the company, these internal credit reports may go by several different names or be considered part of the credit investigation and not called out specifically. For purposes of this module, “credit report” is used to describe a report created (either internally or externally) to convey outstanding credit obligations and payments made.

With this information, a seller can decide whether to grant credit to the buyer or not. A decision to grant commercial credit to a buyer means that a new or existing buyer has the opportunity to purchase goods or services on credit, or on a “buy now, pay later” basis.

But just knowing such doesn’t really paint a complete picture. So, you need to know what information is included in the credit report as another way of defining a credit report.

The components of credit reports include a history of the business; payment trends provided by other vendors (but reported anonymously); general bank information; public records of law suits; and, financial statement information on public companies or private companies when volunteered by the buyer.

History
The history of the business includes how long it has been in business, the form of the business (corporation, proprietorship, and partnership), background of the owners, and the number of employees. Some credit evaluators say that the longer a business has existed, the better likelihood it will survive. This is not necessarily true, but an important part of the history of the business is past (antecedent) information about the current management in terms of experience, education and the like.

Payment Trends
Payment trends are gathered by credit reporting agencies, mostly when companies agree to submit payment history. The reporting agency assembles this data and reports, anonymously, the high credit extended, amount owing, amount past due, days taken to pay. This information is valuable to an international credit manager because if a report on a potential buyer indicates prompt payment trends to other vendors, it is likely (but never a sure conclusion) that a seller making the credit inquiry could be paid promptly.

Bank Information
Bank information as part of a credit report is important to a seller. Often if a buyer has a record of paying the bank its obligations (loans) on a timely basis, an international credit manager can see that the buyer may have the ability to pay trade or supplier obligations. The credit report will indicate, in many cases, the highest credit provided by the bank to the buyer, how much is currently outstanding in loans, if the loans are secured by assets, and the way the buyer has paid. An international credit manager should be careful, for example, if he/she learns that a sizeable checking account balance exists the day of the credit inquiry, It is quite possible that that balance could be gone the next day. The average balance in the checking account of the buyer gives a seller a sense of the cash available in a buyer’s account. Sellers should always be concerned with a buyer’s cash flow since it determines the ability to pay obligations as they mature.

Public Records
Public records, including suits, judgments, bankruptcies, business acquisitions/changes that are recorded in state or federal agencies, give a seller an indication as to problems that a buyer made have had in the past. Often government agencies, both in the US and abroad, will provide information on the company being researched, with material provided according to the law of that country.

Financial Information
Financial information, such as the balance sheet, operating statements, and cash flow reports, are often provided on public companies; in many countries (like the US), this information is on record with the government. Private companies may elect to submit financial information but are not required to do so. It is important to remember that the financial records of international companies may look different, use different terminology and contain calculations that are all different from the standard accounting practices used in the US. These differences must be taken into consideration when analyzing foreign financial records.

Some reports are oriented towards specific industries and will provide specialized industry information that covers the specific product or service. For example, industry credit groups  for giftware, forest products, and chemicals have their own members who submit information into an organization that compiles the data and provides payment histories, although not naming the members who submit the payment history to mutual buyers. Prev | Next


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Sources of Credit Reports/Purpose of a Credit Report

The Purpose of a Credit Report
The credit report has become an important economic tool in the process of a credit investigation and subsequent analysis. Without this instrument, many sellers would not be in a position to evaluate the ability of a company to pay in accordance with the contracted terms.

Without a credit report, sellers would either sell on a type of secured transaction (usually requiring a letter of credit, or prepayment, including wiring funds in advance of the sale of the goods or services to the buyer versus allowing the buyer 30 to 60 days or longer to pay. Many people believe the economic growth of any country is dependent on the ability of businesses to buy goods or services on a basis of “pay later.” Without the availability of credit reports, sellers should be concerned if they will be paid and when they will be paid.

There is an old maxim: “The sale is not complete until it is paid for.” Without credit reports, a seller could record revenue (sales), but unless there is a tool to evaluate a buyer’s history and ability to pay at a future time, the recorded sale could become a bad debt for the buyer without the sale ever actually being realized.

The ability to provide credit to buyers plays an integral part in the world economy. If business on a worldwide scale was on a cash-and-carry basis, business as we know it would not exist. Those sellers who wanted to “grow their businesses” recognized early in history that a “promise to pay” was one way to allow buyers to take more goods or services than immediate cash might permit, re-employ the goods or services in their own business, generate funds, make a profit, and pay the seller according to agreed upon payment terms. ("Improving Credit Practice,” Miller and Relkin, AMA, 1991.)

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Sources of Credit Reports/Direct Sources of Credit Information

Direct Sources of Credit Information
Which type of investigation is the best depends, as you may have already guessed, on the situation. So, if a seller’s international credit managers choose to use a direct investigation as the approach, or even just some aspects elements of a direct investigation, they are going to need to know a little about the sources of credit information they can use and how they may go about collecting it.

The Buyer
To initiate a credit investigation, always begin with the buyer. A tactful way of soliciting this information is for the seller’s business to initiate an exchange of antecedent and financial information between the seller and the buyer. At best, the buyer may volunteer valuable data, including financial reports, a detailed biography of the principals, and a history of the business going back over several generations. At worst, the buyer will provide no information at all, feeling that such a request reflects upon the integrity of the principals.

As a result of differences in accounting methods, international financial statements cannot generally be analyzed in the same way as domestic statements and often are not as easy to obtain as in domestic situations. They are also difficult to evaluate because accounting practices and tax regulations differ widely from country to country. The time required to gather information is greater than in domestic operations, so many international credit managers build a comprehensive file of information on prospective foreign buyers so they may make quick decisions when necessary. Credit information sources range from the buyer to the comprehensive economic and business data compiled by U.S. government agencies, by the international departments of banks, by private trade promotion organizations, and by publishers and organizations that foster foreign commerce.

Direct Correspondence
Direct correspondence is the most common basis for contact with all buyers. Opening accounts presents an excellent opportunity to set a tone that will keep a buyer providing credit information. Today correspondence can be conducted by telephone, facsimile (fax), and e-mail, as well as through the US Postal Service. However, an international credit manager must use discretion and match the medium with the nature of the communication.

Request for Financial Statements
The best place to put a request for financial statements is in the credit application. The application should have a requirement for a customer to provide regularly audited financial statements or to provide them on request. Enclosing a blank financial statement form with the application serves several purposes. It reveals to a buyer that supplying financial information is indeed a common practice; it makes it easier to comply with the request; and it helps ensure that all information desired by the credit department will be submitted. The use of a standardized form also makes analysis of information easier. It is particularly advisable to send a standard checklist of questions rather than an individual request when a follow-up is necessary to amplify items on a statement already submitted.

Telephone Contacts
Telephone contacts can be used to supplement financial information on statements submitted to the company or to a credit agency, to obtain references, to bring financial information up to date, and to verify reported contracts. Often the next best thing besides a personal visit is using the telephone, which has the added advantage of being less costly and time-consuming. Before making telephone contact, it is wise to prepare a form noting the points to be covered and the information needed. Doing such is very helpful, particularly for the inexperienced, or when a large number of points are to be discussed. E-mailing an agenda and time that the telephone call will be placed is a smart approach by an evaluator, especially if international time zones are involved.

As in the case of the personal interview, a memorandum of the telephone conversation should be written promptly and placed in the credit file.

Bank Information
An excellent source of credit information is a seller’s bank. An inquiry directed through this source stands a better chance of obtaining useful information than one directed to a foreign buyer’s bank. Bank information generally includes a history of a foreign buyer, antecedents of the principals, and some financial data. A fairly complete picture of a firm’s credit standing often may be obtained; but, depending on a seller’s risk, bank reports should be supplemented by information from other sources.

Overseas Banks
Overseas banks vary widely in their co-operation with requests for information; and, like information received from a buyer, the credit information secured directly from a foreign bank varies in value. It may include business history, business background of the principals, financial data, or merely comments that this foreign buyer is a respected member of the community.

Bank-to-Bank
It is possible for a seller’s bank to check with a buyer’s bank when an international credit manager’s efforts are unsuccessful or when special information is needed. Normally an international credit manager will employ this technique when a large value order is pending or initial appearances indicate some higher level of payment risk potential than normal for a seller. Often this technique is successful since banks might disclose more information to other banks than they do to sellers or trade creditors who are not their depositors. Sometimes a fee is charged for this service. When considering the circumstances, this fee might be very well worth the investment.

Information Sought in a Bank Inquiry
An international credit manager should explain the scope, nature, and reason for the inquiry. The depth of response rests on several basic factors. First is the amount of money involved. Then the credit manager must be certain that the proper person is contacted at the bank; be well prepared with precise questions before calling or writing; and be careful not to violate the following caveats. Banks will not usually volunteer unsolicited information. They will, however, answer specific legitimate questions that do not violate confidentiality. An inquiry that involves a large value and includes specific data, such as terms of sale and a request for financial details, may well receive a more detailed reply than one that refers to a small value with vague reference to the terms of sale and other factors. Banks will generally decline comment about a company’s ability to pay a specified amount.

Seller’s Foreign Sales Representative
A seller’s sales representative or company agent abroad can also be a valuable source of information. Local, in-country representatives should know much about their customers--not only purchasing patterns, but the company’s reputation, competitive environment, employee satisfaction and the like. An agent is known in the customer’s trade circle and has access to credit information from local banks and commercial sources. A representative can therefore offer a fair picture of a customer’s financial condition, as well as confidential data which would be difficult to obtain from any other source. Of course, if a local sales representative is native to the country, he/she will have a better understanding of business and cultural issues that impact the local customers. An international credit manager must also take into consideration the cultural ties and business relationship between the parties involved.

Trade References
Trade information consists of facts obtained from merchandise suppliers of the customer, including the following:
 * 1. Recent high credit, amount owing, amount past due
 * 2. Whether customer payments are discounted, prompt or slow and, if slow, how many days
 * 3. Whether a supplier has referred the account to a collection agency
 * 4. Other facts about the buying and paying record of the customer

This vital information describes how the customer actually pays bills, regardless of other financial facts.

The payment record should be examined for specifics as well as for the trend of payments, and be reconciled with the condition indicated by a buyer’s financial statements. Though slow trade payments are often a sign of trouble, they may also characterize a business that is having growing pains but is substantially healthy; its slowness may be seasonal or a result of expansion.

Sources of Trade Information
Depending upon a buyer, the industry, location, size of order, and other factors, an international credit manager has several places to get this information. Those most commonly used include credit reporting agencies that report on all industries, industry credit groups, direct interchange with other suppliers, and agency trade checks.

Direct exchange of information with other suppliers is costly and time-consuming but can be very useful when there is substantial credit exposure, when agency and bureau reports are inadequate, or when industry group interchange is not practicable. Personal acquaintance, proper identification, and mutual trust and confidence play a key part in these direct exchanges. International credit managers should also bear in mind the legal limitations to such an exchange, as noted earlier.

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Sources of Credit Reports/Other Sources of Direct Investigation

Other Sources of Direct Investigation
Sources of information are plentiful and limited only by a credit manager’s lack of creativity. The following sources are by no means exhaustive of the information available for credit investigations.

Newspapers
The Wall Street Journal, Financial Times , and local newspapers are important, essential reading for a credit manager. First, it is important to understand the current economic climate. Second, there is much company-specific news that can affect credit decisions or at least suggest further investigation.

Directories, Internet and Other Reference Materials
There are a host of printed materials useful in a credit investigation. First, there are the standard sources: Thomas Register, Wards Business Directory , Directory of Corporate Affiliations , MacMillan Directory of Leading Private Companies , Moody’s Industry Review , Million Dollar Directory , Experían Trade Payment Guide , Value Line Investment Survey , and several different publications from Standard and Poor’s and Dun & Bradstreet. Specific industry references can be helpful as can directories of state businesses and chambers of commerce.

The amount of general information (publications, periodicals, and news services) on the Internet is truly overwhelming. Internet access does make it easy for a credit executive to check out many more publications than one would normally purchase to read. All the major newspapers are available on the Web. Right now The Wall Street Journal is one of several charging an access fee. Publications such as Fortune and the Economist are online, as is Business Credit (on the NACM site). Financial networks, such as CNN Financial News and Bloomberg, are also useful.

Finally, the Internet offers a fast, efficient, and effective way to communicate with buyers. E-mail seems to work faster and has an inherent friendliness that is a bonus in international credit management situations. People find it easier to compose e-mail messages rather than to use regular mail. Of course, a global credit executive must ensure that e-mail messages adhere to the same standards as regular letters. A relaxation of style does not mean relaxing credit policy or normal business practices.

Much credit information is confidential in nature. A professional credit manager should take every precaution to maintain standard levels of confidentiality, which may mean using encryption or otherwise securing messages and transmissions. Security also means controlling access to the computer where e-mail messages are stored ( Business Credit Principles, Field Version 4, NACM Publishing).

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Sources of Credit Reports/Indirect Sources of Credit Information

Indirect Sources of Credit Information
Every experienced credit manager can recount instances when “going direct” in an investigation or a personal visit revealed pertinent information about a credit applicant that was otherwise unavailable. However, as mentioned before, the truth is that many international credit managers today have neither the staff nor the time needed to conduct thorough direct credit investigations, especially when dealing with overseas markets. Instead, they turn to a third party.

In order to appreciate the list of indirect sources of credit information provided below, you need to understand how the data which is provided from these credit agencies (through credit reports purchased by a seller or exporter) is created. For starters, all information today is automated and is usually obtained via CD-ROM or down loaded directly from a mainframe computer. Automation and technology have made credit reports more attractive to credit executives for several reasons.

Combined with vast databases, computers can provide information about companies nationwide. Large companies today deal with tens of thousands of customers who are more and more often not geographically local to them. The level of effort required for direct investigations on large numbers of customers is beyond the means of most companies and would take far too much time. Reports can be generated instantly and sent electronically or faxed for same-day responses. Decisions about credit applications are time-sensitive. There is usually urgency for a fast decision in order to make a sale. The ability to obtain a credit report on a same day or one-day basis can affect a company’s revenues.

The cost benefit of using credit reports, or reports purchased externally by a seller or exporter, is high. The salary of a credit investigator can pay for more credit reports in one year than an investigator could produce in one year. There are also additional savings in telephone, postage, supplies, storage, and overhead costs.

Credit reports can provide additional marketing data for the company. Examples are checking a customer’s trade lines for growth and, therefore, the possibility of additional sales or reviewing trade terms for customers according to their credit risk. Some credit reporting companies also provide relational information reports. The internet has greatly reduced the cost and improved the accessibility of credit reports. Many services provide information on a free or pay as you go basis.

A number of agencies provide business information reports on companies located inside as well as outside the United States. Some of these also provide domestic credit reports, while others focus primarily on non-US companies. FCIB, Dun & Bradstreet, Experian, SJ Rundt, OECD, Graydon America are some of the groups that report on non-US companies. In general, reports on foreign companies are similar in content and format to domestic reports. They may be purchased individually or contracted for in advance.

U.S. DoC Commercial Service International Company Profile
The International Company Profile (ICP) is a service provided by the US Department of Commerce Commercial Service. ICP’s are available on companies located in over 80 countries. The exporter is charged a small fee for each ICP, and the information is provided within 10 days or less. The ICP includes the following:
 * a detailed credit report on prospective sales representatives
 * a listing of the company’s key offices and senior management
 * banking and other financial information about the company
 * market information, including sales and profit figures as well as potential liabilities
 * an opinion by the overseas US Commercial Staff as to the viability and reliability of the overseas company or individual as well as an opinion on the relative strength of the company’s industry sector in the target market.

FCIB
FCIB-NACM, an association of executives in Finance, Credit and International Business, is a wholly-owned subsidiary of NACM which serves professionals involved in worldwide export financing, credit, treasury and international subsidiary management. The purpose of the association is to raise the level of expertise and professionalism of members and to provide enhanced job enrichment through relevant discussion and exchanges of experiences. Among the services FCIB provides are the following:
 * Conferences. FCIB holds regional US meetings, three international conferences, and an annual Global Conference, all of which focus on current worldwide credit, collection and exchange problems as well as in-depth country discussions.
 * Industry Export Credit Groups. FCIB operates eight export credit groups in the US and Europe. The groups meet to discuss past experiences of individual mutual accounts as well as general country problems specific to the industry.
 * International Bulletins and Newsletters. Current changes affecting credit, collection and exchange conditions throughout the world are reported in the FCIB international bulletin which is distributed to all members. The bulletin, which presents a “reader’s digest” for members, is an invaluable aid to keep them abreast of ever-changing conditions in world markets normally not discussed at meetings.
 * Country Reports. These reports summarize current experience of international finance and credit managers, capturing timely, in-depth information on the credit risks of export sales in 16 countries. FCIB’s country reports assist international credit professionals to forecast foreign exchange availability, transfer risks and prospective currency changes.
 * International Credit Reports. FCIB, because of its large volume, is about to offer its members access to the major international credit reporting agencies at attractive prices.

Dun & Bradstreet
The largest general reporting agency is Dun & Bradstreet (D&B). It has information on more than 92 million firms world-wide, although not all of it is complete. While firms have to voluntarily give trade data, D&B is the one of the few agencies that uses reporters to gather information about companies.

Business Information Report
A basic credit report developed by D&B reporters provides information obtained from direct interview with a business owner, partner, or corporate officer. It is then confirmed and expanded through investigations with the business accountant, banks, and supply sources (for payment experiences); by checking public records at federal, state, and county levels; and from a review of D&B’s own internal files. After all the information is analyzed to determine the strength and desirability of the account as a credit risk, a D&B rating is assigned and the data compiled into the written Business Information Report.

While reports are normally scheduled for updating every six months, revisions are made whenever circumstances warrant. Other information, when uncovered, is issued in a report form called the Special Notice. These flyers contain data on such items as fires, floods, deaths, tax liens, suits, judgments, new products, and branch openings. When the information is of such nature as to affect the credit rating, either upward or downward, the entire report is revised and a new rating is assigned.

D&B Rating
Each full rating involves two factors: first, a double-letter or number-and-letter combination identifying financial strength; second, a single-digit number on a scale of one to four, indicating the composite credit appraisal as high, good, fair, or limited. Ratings are a convenient method of measuring accounts in addition to serving as a broad basis for credit insurance classifications.

D&B Reference Book
Key information extracted from the Business Information Report forms the basis for listing in the D&B Reference Book. A “P” at the end of the listing indicates that a Payment Analysis Report is available on a particular business. Some listings are prefixed by the letters “A” or “C.” The “A” identifies a business listed for the first time. A “C” prefix signals a change in rating since the prior edition. The Reference Book contains nearly three million listings of commercial enterprises in the United States, Puerto Rico, and the Virgin Islands, arranged alphabetically by cities within states. The Reference Book is updated and republished every 60 days.

Payment Analysis Report
A PAR features the PAYDEX numerical scoring system. It gives an instant overview of a firm’s payment habits. Seasonal variations, payment performance trend, and the historical payment pattern are graphically illustrated.

Experian
Experian is the credit reporting business that was formerly TRW. It differs from the other reporting services by including very small businesses and sole proprietorships as well as larger companies in its data base. Experian has an easy-to-follow menu on its website that allows a credit manager to obtain either of the two reports below via the Internet using a credit card to pay the fee.

Experian Intelliscore
Experian uses statistical methodology to give each business in its data base a composite credit risk ranking between 1 (worst) and 100 (best). It is designed for credit managers processing large volumes of credit applications or transactions. Companies using this service can establish multiple scoring ranges with assigned actions, so accounts that need further investigating are clearly indicated.

Relationals Information
Experian also offers companies relational credit information that they can use with electronic filters to enhance their credit decisions, set benchmarks, and fine-tune sales tactics.

Standard & Poor's Business Profile
Companies can obtain a business profile of a customer that includes financial information from Standard & Poor’s, the average number of days late (DBT) a company pays its bills past the invoice due date and a predicted DBT 60 days in the future, payment trends for the company and its industry, and UCC filing data.

SJ Rundt & Associates
As a reporting agency, this firm provides two reports: first, the World Business Intelligence, a weekly briefing dealing with 14 to 16 countries each, assessing the latest economic and political developments, focusing on those that are important, explaining what they portend for the future in international trade, investment and finance, interest rate and exchange rate tables and forecasts. The second report is the Financial Executive Country Risk Alert, issued three times per year, which is a combination of forecasts and survey results assessing export credit and short-term financial risk for over 100 countries. Risk ratings on a scale from 1 (best) to 10 (worst). Between full updates, countries are subject to weekly reviews and are updated individually (and re-rated, if necessary).

Organization for Economic Cooperation and Development (OECD)
The OECD is a Paris-based intergovernmental organization, established under a 1960 convention, whose purpose is to provide its 29 member countries with a forum in which governments can compare their experiences, discuss problems they share and seek solutions which can be applied within their own national contexts. The fundamental task of the OECD is to enable its members to consult and cooperate with each other in order to achieve the highest sustainable economic growth in their countries and to improve the economic and social well-being of their populations. The original members of the OECD were Europe and North America, followed by Japan, Australia, New Zealand and Finland. Just recently, Mexico, the Czech Republic, Hungary, Poland and Korea have joined.

The OECD publishes various booklets which assess economic trends and prospects. Many statistics are available through its on-line bookstore.

Other Private Credit Companies
Graydon America, Hoovers and Coface North America are providers of online and offline business credit reports from around the world via the Internet. They have nearly 100 countries online, including Europe and the US. With more than 200 countries offline, sample reports can be accessed through the website.

References

1.. Reporting Accounts - a free UK provider of credit reports.

2.. Experian - Multinational credit report service.

3.. Dun and Bradstreet - International credit report service.

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Sources of Credit Reports/Summary

Summary
Credit allows a buyer to take possession of something now and pay for it later or over time. An integral part of granting credit information is requesting and analyzing a credit report. This report provides information in order to make a specific decision about granting credit to a company. An investigation, done correctly, has the goal of a seller obtaining accurate and timely information about a buyer, information that will lead to an appropriate decision for a seller in determining whether credit will or will not be approved, and if so, on what terms.

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Sources of Credit Reports/Resources

Resources
Coface North America - www.coface-usa.com Credit Management Information & Support - www.creditworthy.com

Web Resources
Credit Reports Worldwide - www.creditreportsworld.com Dun & Bradstreet – www.dnb.com Experian – www.experian.com FCIB - www.fcibglobal.com Graydon America - www.graydonamerica.com Hoovers – www.hoovers.com SJ Rundt & Associates - www.rundtsintelligence.com OECD – www.oecd.org US Dept of Commerce – International Company Profile – www.export.gov

Attachments
These attachments illustrate the type of information that needs to be gathered from new customers. In addition scenarios can be created by completing the forms for a customer and asking the students to approve payment terms based on the information provided.
 * Credit Application – used to request information from new customers
 * Vendor Ref Form – used to request information from vendor references provided by customers
 * Bank Ref Form – used to request information from bank reference provided by customers

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Sources of Credit Reports/Activities

Activity
Discussion In discussion groups, determine what the various elements of a credit report mean and what risk factors would need to be evaluated when considering extending a line of credit to a customer.

Process It is Friday at 3 PM, and you have to make a credit decision on a large, first order from a new customer. You need to decide if using a “direct” investigation or “indirect” investigation will work best. Your sales department is expecting you to make a decision by 5 PM the same day.

Outline the process and alternatives you have to complete the investigation.

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Sources of Credit Reports/Assessment

Assessment
{Which of the following is a definition of a credit report? -An instrument that will provide ease in obtaining bank financing -A required report by most government agencies +A tool to assist a seller in assessing payment potential of a customer -A report that is the best source to view financial information of a potential customer
 * type=""}

{The concept of a credit report includes -meeting legal requirements of a business license. -providing a way in which a business can solidify a bank line of credit. -providing a debtor the means to outline his/her business principles. +offering an opportunity for a creditor to review key information to make an informed decision.
 * type=""}

{The main purpose of a credit report is to +establish a method for customers to obtain favorable payment terms. -clarify the credit rating of a potential customer. -allow a business to select qualified vendors. -clarify financial rumors about a company.
 * type=""}

{Which of the following is an example of a direct method of credit investigation? -National Association of Credit Manager (NACM) +Customer financial reports -Experian credit report -Industry trade groups
 * type=""}

{Which of the following is an example of an indirect method of credit investigation? -Wall Street Journal -International bank records +Dun & Bradstreet credit report -customer financial reports
 * type=""}

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Costs and Value of Credit/Credit Report Assessment Factors

Credit Report Assessment Factors
Before international credit managers decide whether a direct or indirect investigation is appropriate, they need to consider five factors: credibility, cost, value, timeliness, and completeness. Neither the direct or indirect approach is the best when all five factors are considered. A credit manager must to assess whether cost and timeliness is more important than completeness or value. As is the case in most business decisions, it depends on the circumstances.

Credibility
Each report has its own credibility factor, just as the organization has that produces the report. There is no “one, magic” source: a review of the country that the customer is located in could impact the report; the reputation of the firm producing the report often can change, as corporations are bought and sold. Such is true when using either a direct or indirect approach.

Most astute credit people have “favorites” based on their own experience, but there is a danger to this approach, since some firms have a better reputation in some countries than others. Since many of the reporting firms contract with outside organizations to develop the data, there is valid concern as to the accuracy of the information.

Costs
Costs can be measured two ways. For a direct investigation, the costs associated with a seller’s international credit manager and analysts should be considered. For indirect investigations, costs are typically measured by the fees paid for the report.

Credit reports are sold on a per-investigation basis, which can range from $60 to $200, to a contract basis for so many units for so many dollars over a period of time. It is not uncommon for a Fortune 100 US company to have a budget of $200-$400K per year for contract information on customers as well as countries. In addition, a wise international credit manager knows that his/her bank will provide information on select customers, often at no charge and as a result of the company’s banking relationship. Credit insurers and insurance brokers, even if an international credit manager does not have an insurance policy with a carrier, are an excellent and often free sources of credit data.

Fortunately, there is considerable information available on the Internet to help alleviate costs. The amount of general information on the Internet is truly overwhelming: publications, periodicals and news services. Internet access does make it easy for the international credit manager to check out many more publications than one would normally purchase to read. All the major newspapers are available on the Web. Right now, The Wall Street Journal is one of several charging an access fee. Publications such as Fortune and the Economist are online, as is Business Credit (on the NACM site). Also useful are the financial networks, such as CNN Financial News and Bloomberg. Finally, the Internet offers a fast, efficient, and cost-effective way to communicate with customers. E-mail seems to work faster and has an inherent friendliness that is a bonus in credit management situations. Somehow, people find it easier to compose e-mail messages rather than to use regular mail.

Of course, the global credit executive must ensure that e-mail messages adhere to the same standards as regular letters. A relaxation of style does not mean relaxing credit policy or normal business practices.

Much credit information is confidential in nature. A professional credit executive should take every precaution to maintain standard levels of confidentiality, which may mean using encryption or otherwise securing messages and transmissions. Security also means controlling access to the computer where e-mail messages are stored.

Value
The credit report is only one source that a credit manager needs to make an intelligent decision about the level of risk. No seller should rely completely on a credit report. If a direct investigation is being considered in full or in part, there are other sources to be considered.

The Customer
The best starting point for credit information is always with a buyer. Some buyers are more forthcoming with information than other providing credit references, financial information, and details as to the background of the principals, and a history of the business. Many buyers, however, feel that their information (if it is a non-public business) is not to be shared with other businesses. In such situations, an international credit manager needs to be sure to develop a relationship based on trust, so that potential buyers are comfortable releasing critical information.

The Sales Representative
A seller’s sales representative abroad can also be a valuable source of information. In all probability, a sales agent has had the opportunity to study a buyer’s business practices firsthand. A sales agent is known in the buyer’s trade circle and has access to credit information from local banks and commercial sources. A sales agent can therefore offer a fair picture of the buyer’s financial condition, as well as confidential data that would be difficult to obtain from any other source. Often a sales agent will have a personal relationship with a buyer contact, whether it be the owner or decision-maker. An astute international credit manager recognizes that this relationship needs to be emphasized if he/she wants to obtain information and develop a level of confidence with the customer.

Timeliness
Timeliness is a particular issue with international credit investigations. In some cases the overseas credit reporting agency can take two weeks or more to respond. In that situation, a direct approach may be timelier and more appropriate.

If you have ever read a magazine article or book on “what’s going on in a particular county,” you know that it is often already outdated material. In the time it took to get the information printed, circumstances may have changed. On-line web resources, daily and weekly newspapers ( The Asian Wall Street Journal or The Financial Times ) are the often the answer for obtaining truly timely information.

An astute international credit manager utilizes in-country accounting firms, lawyers, and bankers he/she has developed as resources of information. “People on the scene” usually are an excellent source for local news and information.

Completeness
It is rare that any credit report is truly “complete.” Even if payment information, financial data, and antecedent information exists, an international credit manager may be unsure as to country conditions.

Through experience, networking and education, an international credit manager can conclude what a “good” report is – often determined by the level of risk estimated; the value of the order; the need to meet sales goals; and the nature of the transaction, whether, for example, it is  a one-time order or a lasting relationship (Exporting – From Start to Finance,  Wells and Dulat-McGraw Hill).


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Costs and Value of Credit/Summary

Summary
There are a variety of costs associated with gathering credit information. These costs vary based on the type of information you are gathering, the company and country you are gathering about as well as the ways you need this type of information. It is important for a global business professional to know where to get the information, the estimated costs and the time it will take to gather the information. For budgeting you must take into consideration the estimated costs to have a better feel for the overall costs of doing business in your global markets.

title: Costs and Value of Credit/Summary


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Costs and Value of Credit/Resources

Resources
Exporting – From Start to Finance, Wells & Dulat - McGraw Hill The Global Entrepreneur, Foley - Jamric Press International Coface North America - www.coface-usa.com Credit Management Information & Support - www.creditworthy.com

Web resources
Credit Reports Worldwide - www.creditreportsworld.com Dun & Bradstreet – www.dnb.com Experian – www.experian.com FCIB - www.fcibglobal.com Graydon America - www.graydonamerica.com Hoovers – www.hoovers.com SJ Rundt & Associates - www.rundtsintelligence.com OECD – www.oecd.org US Dept of Commerce – International Company Profile – www.export.gov

Attachments
Sample Credit Report

title: Costs and Value of Credit/Resources


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Costs and Value of Credit/Activities

Activity
You have received an order for US$750,000 from a new customer. The customer has requested open account payment terms of Net 90 Days on Invoice Date. Having no prior experience with this customer, you need to conduct a credit investigation before you extend payment terms.

 * 1. Identify the cost of a credit report from three different agencies as listed in the resources.

 * 2. Compare and contrast and the characteristics of the credit report and determine the best investment to make in order to decide on payment terms for your new customer.

 * 3. Discuss the other information you might need to grant payment terms.

To vary the activity, divide the class into groups or have each individual research the cost and characteristics of credit reports from different countries assuming the customer is based there.

title: Costs and Value of Credit/Activities


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Costs and Value of Credit/Assessment

Assessment
{Evaluation criteria used to assess credit report sources include -only speed. -source of the information. -language the report is written in. +speed & accuracy.
 * type=""}

{The average cost for an individual credit report is -$50 – $60 each. +$60 – $200 each. -$200 – $300 each. -$300 or more each.
 * type=""}

{The most comprehensive credit information can be obtained from -indirect sources only. -the international sales team. +direct and indirect sources combined. -direct sources only.
 * type=""}

{In the business world today the greatest challenge to the international credit manager is +evaluating too much information. -the lack of information available. -the cost of available information. -securing accurate information.
 * type=""}

title: Costs and Value of Credit/Assessment


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Effects of Late or Non-payments/Tenets of Risk Assessment

Tenets of Risk Assessment
The tenet, or established fundamental belief, of risk assessment is that international credit managers must constantly attempt to gather as many facts as possible in order to make the best credit decision for their companies. Their challenge is to evaluate and quantify the risk factors associated with granting credit to a buyer. This task becomes more challenging when a buyer is from another country. In the previous lesson, five factors were presented to consider when assessing a credit report: credibility, cost, value, timeliness, and completeness. Although each influences the level of risk to some extent, credibility of the information is particularly important in a risk assessment. For example, how does an international credit manager differentiate between fact and opinion? Another challenge is the fact that many buyers, especially if they are private, will not or cannot provide the necessary tangible information to assist in the risk evaluation process.

Company credit policies do not normally address the specifics of making the “best” credit decision. The credit procedures established by an exporter should include risk parameters. Risk parameters typically focus on clearly stating who is responsible for credit decisions, including the payment terms as well as the transaction value each person is empowered to make in a decision as to payment terms of sale to a buyer.

The credit procedures might also include how much credit an individual or department can extend, the escalation or approval process to decline or increase customer credit lines, and specifics as to when and who determines if a customer credit decision may require collateral.

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Effects of Late or Non-payments/Risk and Reward

Risk and Reward
To risk non-payment or to risk not meeting sales expectations--that is the decision. The issue of selling into the international environment revolves around balancing the risk of being paid on time against the reward of meeting sales and profit targets. The goal, therefore, is to maximize sales while minimizing losses by being paid according to payment terms. There are many risk/reward factors that must be taken into account to balance the expectations of sales and marketing against the financial concerns of slow, partial or complete non-payment. Each company normally establishes expectations or policies as to sales volume and market share.

An example of risk/reward factors could involve selling at a higher price to a customer in a country with significant political and/or economic risk, where risk of nonpayment would be greater than selling the same product in Western Europe at a lower price where risk of nonpayment is lower. Another example might involve working with the sales department for a “first sale” into a new market, perhaps at a lower price than listed on the price sheet, in order for a seller to try and gain a “foothold” for additional business in a country new market, one not sold to before. The risk of selling at the usual price may increase the risk that a foothold in that market will not be gained.

With financial statements, trade references, and bank relationship information, an international credit manager can begin to evaluate a buyer by determining a buyer’s financial capabilities, the manner in which a buyer pays competitors, and how and when a buyer pays bank loans.

The credit risk evaluation is also influenced by the specific situation and country of the customer. Experienced international credit managers (five or more years of credit and collections experience) use their experience to establish levels of risk factors, high and low, depending on the manner in which a seller approaches risk analysis, and reach a credit decision that best meets the needs of marketing and finance.

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Effects of Late or Non-payments/"Eight C's" of Credit Risk Assessment for A Global Seller

“Eight C's" of Credit Risk Assessment for A Global Seller
Whether a sale is a domestic or international transaction, there are five “C’s” to consider during a credit risk assessment: character, capacity, capital, condition, and collateral. In addition, there are three more “C’s” to consider when the assessment is considered an international transaction: country, currency, and cultural risk.

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Effects of Late or Non-payments/The 5 "C's" (Domestic and International)

The 5 “C’s” (Domestic and International)
Character, capacity, capital, condition, and collateral are as follows:
 * 1. Character refers to a buyer’s willingness to pay obligations.
 * 2. Capacity is a buyer’s ability to pay.
 * 3. Capital refers to a buyer’s equity and signifies the financial strength.
 * 4. Condition reflects a buyer’s economic situations.
 * 5. Collateral refers to a buyer’s access to additional resources to use for payment.

Character
A buyer’s willingness to pay obligations is assessed by considering a buyer’s morality, integrity, trustworthiness, and quality of management. Character is also assessed by considering a buyer’s success, payment record, and information from current suppliers. Examples of information for such assessments should be intangibles (family background, employment record, personal credit history) that are used to form a tentative opinion. The range of findings could include favorable payment records or, on the negative side, a record of bankruptcies or litigation. For many credit mangers, bankers, and risk managers, the trait of “character” is often considered the most important.

Capacity
A buyer’s ability to pay or a buyer’s ability to generate cash flow and pay when a debt is due can be determined when assessing capacity. Assessing capacity involves considering prior business experience with related operations, particularly large volume orders, exacting specifications, or tight delivery schedules. The outcome of the assessment should show positive evidence of successful operations and on-time bill payments.

Capital
A buyer’s equity or net worth signifies the financial strength of a buyer and may demonstrate an ability to pay obligations. A positive capital assessment reveals a business that shows increasing sales, profits, and net worth as well as favorable operational trends.

Condition
The market’s current and expected general economic situations may affect the applicant's business. When assessing condition, consider past and current political history, recent economic events, and currency issues. During the assessment, also consider analyzing industry cycles and consolidations and whether the industry is subject to favorable or unfavorable trends. Credit managers should analyze the business cycle of credit applicants.

Collateral
A buyer’s ability to access additional resources (equities or other assets) to use for payment if that buyer’s capacity or character fails is important. Specific assets, such as receivables or inventories, can be pledged via liens against these assets, based on international laws that regulate these types of transactions. Other forms of collateral are letters of credit, standby letters of credit from the applicant's bank, guarantees by the firm or its parent, personal guarantees from the principals, and pledges of investment holdings such as stocks or bonds, or other investments. It is important to determine whether potential collateral is free and clear and has not already been pledged to other creditors.

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Effects of Late or Non-payments/The 3 "C's" (International)

The 3 “C’s (International)
In international credit management, country, currency and culture risks are inextricably linked to assessing a buyer’s risk. They must be evaluated together for the assessment of one will depend on that of all others.

Country Risk
Globalization is not just a cliché. It is happening all around, as businesses increasingly look at the world as if it has no national boundaries. Governments, on the other hand, still tend to make policy in what they perceive to be their country's national interests. With globalization, competition sharpens worldwide, but nationalistic laws frequently make for a highly uneven playing field. There are three important principles in country risk assessment:

1. Countries are interdependent.

2. Country conditions affect customers.

3. The assessment must be systematic, objective and relevant.
 * a. Systematic means it must be proactive, looking ahead rather than being merely reactive. There must be specially assigned people charged with the task of country evaluation who can be held accountable. The process of assessment must be continuous for markets in which the company has an interest, not just a task undertaken when a new order comes in. The process requires regular, reliable, assured flows of information, both into the company and within the company, for instance, from international credit managers to sales people. The evaluation of country information must also be structured so that important signals are not overlooked and key questions are being asked.

 * b. Objective means that the evaluation should be free of all personal bias. Countries can and do change, both from good to bad and from bad to good, all too often within very short periods of time. External conditions also can change, as they did for Argentina when Brazil devalued its currency; so countries should be assessed not in isolation, but in the context of what goes on around them.

 * c. Relevance relates to how practical and pertinent the evaluation of the country risk elements fit with the needs of a seller. For example, if a seller is considering the risk factors of selling to Italy and Italy has a change in government, this change might not be enough of an impact for a seller to find it relevant to if or when he/she will be paid. A global credit manager may question the value and significance of examining the cultures that exist in countries where export business is projected. The pro-active company and international credit manager will recognize that personal and company relationships still are critical, both in the development of new markets and in ensuring that payment obligations are processed in a timely manner.

Currency Risk
Currency risk in international credit management arises from an export invoice (a receivable, an asset) that remains unpaid either because an importer's country has imposed exchange controls, making it impossible to convert the funds to the agreed upon currency or because a devaluation has taken place that raises the local currency cost of paying the invoice so much that an importer is unable to pay. The result can be nonpayment in convertible currency (even if local currency payment has been deposited with a local bank) or delayed payment in convertible currency.

Culture Risk
Even though an international credit manager may question the value and significance of examining the cultures that exist in countries where export business is projected, the mores and culture of a business located in an offshore country impact risk. In evaluating "culture" as a risk element, it is appropriate to consider examples of cultures in the world and the way they may impact how business is conducted. For example, in Japan, “WA” or “Inner Harmony” is a concept that many Westerners fail to grasp. When it may appear Japanese will have eyes closed at meetings, they are gathering their thoughts, not sleeping! Management in Japan is known to be very participative and team-oriented. In India, the caste system has larger gone, mostly in urban centers, with underlying cultural variables that structure the life of a person from India. Managers in India generally make most decisions; employees follow rules. In Latin America, the family is of central importance, and loyalty often determines career paths and promotions. In each of these examples, an international manager would be wise to try and understand the “cultural” elements of the business transaction which could impact the process of risk evaluation.

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Effects of Late or Non-payments/Applying the "C's"

Applying the "C's"
The number of variables that can influence how each “C” element is interpreted is countless. However, an international credit manager learns, through experience, the situations where one “C” may be more or perhaps less important in evaluating a credit decision.

For example, the “character” of the management may be of such a concern to an analyst (for example, the owner may have been in bankruptcy) that despite a strong company financial structure, the seller may limit credit to the buyer. Likewise, a “country” assessment may result in a risk manager requesting secured credit with a buyer located in a country that is in economic turmoil, even though this buyer is financially sound.

Usually international credit managers who have developed their skills through years of solid training, mentoring, successes and mistakes (yes, mistakes) are well-equipped to balance and weigh the “C’s” of credit in attempting to reach a decision.

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Effects of Late or Non-payments/Impact of Nonpayment

Impact of Nonpayment
What happens if the credit information that is available indicates the buyer is credit-worthy but the buyer still defaults? The impact of nonpayment or true cost of credit in international business is almost invariably greater than it appears. There are four types of impacts associated with nonpayment, over and beyond the impact to sales:

1. bad-debt (loss) 2. lost interest 3. opportunity costs (alternative use of capital) 4. administrative (chasing the reluctant debtor)

Margins, or profits, on export trade are low to begin with and are constantly under attack because often there are more competitors in a global market than in a local market. In many countries, payment delays are expected, so that a credit manager needs to contend with “credit taken” as well as credit extended.

Credit Taken
The focus of this module has been the concept of extending credit. The next step is to discuss an expanded version of credit extended called “credit taken.” An example of credit taken is as follows:

 * Buyer XZY is given a line of credit of $100,000 and expected to pay in 30 days. On the 25th day, the buyer asks the seller to approve another order for $100,000, meaning that on the 25th of the month, the credit extended is $200,000.  The seller agrees because the buyer commits to make payment for the first $100,000 on the 30th of the month. However, the buyer reneges on this promise so that the seller is owed more than the original agreed-upon credit line.

The chances of nonpayment are always possible, which means the costs associated with nonpayment always take a toll on the profit.

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Effects of Late or Non-payments/Identifying Costs

Identifying Costs
Before presenting the types of costs associated with nonpayment, you should first consider how sales are tracked from a bookkeeping perspective and then consider how costs impact sales.

Some companies do not separate exports sales from domestic sales in their accounting systems. To them, a sale is a sale. However, international sales, as you are learning, sometimes carry costs and risks that domestic sales do not. So what happens if domestic and international sales are combined?

Imagine for a moment that Company A sells its products for $100 each. Costs for selling domestically are $92 for each unit. Costs for selling internationally are $94 for each unit (due to a shipping cost differential). It may seem easy enough to track the differences, but a problem could occur when you add the method of payment and potential risk of nonpayment because variable costs (costs that vary from sale to sale) change. Assume, for example, that domestic sales are paid via 25% cash and 75% credit. The chances of losing profits are less than if all sales were credit. If the domestic credit tends to be low risk of nonpayment, costs of nonpayment may not be a large factor. However, international sales would probably be all credit. Add to that an increased risk of nonpayment and the profit associated with international sales could be significantly impacted.

Keeping the sales and costs together makes it difficult to identify the true profit of domestic sales versus international sales. Knowing the costs of international sales can impact marketing strategies, pricing strategies, and credit decisions.

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Effects of Late or Non-payments/Bad Debt Value

Bad Debt Value
Bad debts are obligations that are not collectible for a variety of reasons such as lack of cash flow from a buyer to remit, misunderstanding of terms and conditions and a resulting inability of a buyer and seller to agree on those differences. Bad debts, under the tax laws of the US, can only be written off as an expense by sellers if they can demonstrate, usually through hiring of a collection agency or lawyer, that every effort has been made to make the collection.

In a survey of over 5,000 businesses in manufacturing, distribution and retail, the National Association of Credit Management found that each dollar of accounts past due is worth the following:

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Effects of Late or Non-payments/Interest

Interest
Assume for a moment that you are a seller and can earn 12% on your money if it were in the bank. This is money that you earned from sales (Sales-Cost=Profit). Assume now that you have agreed to wait for your payment (that is, you have extended credit). Had you not extended credit, hypothetically you would have money from the sale, which would be in the bank earning interest. Extending credit means you are losing the opportunity to earn interest and, therefore, this is a cost.

Another way to consider interest as a cost is to assume you have a loan from the bank. That loan was used to produce your products. Until that loan is repaid, you are charged interest. If the buyer were to give you cash at purchase, you could apply that money to your loan and thus reduce your interest charges and thus your cost. By extending credit to the buyer, you are agreeing to incur interest costs against the money you borrowed in order to produce the product.

Do some math and see how these scenarios might play out (in simple terms). Assume that for each $100 in sales, $95 is cost and $5 is profit. Assume you extend credit and therefore do not receive your monies until some time in the future. If your interest costs are 12% per year (assuming that this money could generate a return of 12% in interest to the seller), your first month’s cost would be $1.00 (12% x $100 = $12.00 divided by 12 months = $1.00). See the table below for additional clarification.

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Effects of Late or Non-payments/Opportunity Cost and Alternate Use of Capital

Opportunity Cost and, Alternate Use of Capital
Consider an example using a yearly sales figure of $12,000,000 or $33,000 per day. If you were receiving $33,000 in cash every day, you would have the opportunity to invest that money back into your business by making more product, investing in marketing, creating a new product line, purchasing new equipment, and investing in internal improvements for employees.

However, if you extend credit to a buyer and agree to wait for that $33,000, you are missing the opportunity those investments could yield. Depending on the investment, the opportunity cost would vary.

Therefore, the goal is to gain access to your $33,000 per day as soon as possible. One way to do this is to reduce your DSO (day’s sales outstanding). If you are currently receiving your daily $33,000 45 days after the sale and you reduce that 45 DSO to 30, you have just gained access to approximately $500,000 that you could invest sooner rather than later. Sooner could mean the difference between getting into the Chinese market or not.

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Effects of Late or Non-payments/Administrative

Administrative
There are several examples of administrative costs.

Losing the ability to discount
For example, if a seller sold to a buyer who was slow to pay, this seller’s cash flow is impacted. Assume this seller has purchased products and services from vendors as part of the business. These vendors may offer a 1% discount to the seller if paid in 10 days. If the buyer had paid on time, the seller could have paid the vendor in 10 days and therefore saved 1%. This is an example of the seller losing the ability to "take" the 1% discount offered by the vendor.

Another discount example may include a transaction with a bank. Assume a seller has the option to prepay his loan with a bank. In return, the bank will discount the fees due the bank. Just as in the other example, if a buyer does not pay on time this seller might not have the money to prepay the loan and receive a discount. This seller has lost the opportunity to save costs associated with the loan. This is a crucial cost, especially in a high-interest period.

Paying penalty/late charges
In this situation, instead of missing out on a discount for not being able to pay earlier, a seller has to pay a penalty for being late. If this seller does not receive payment promptly from the buyer, this seller’s cash flow may be impacted; thus, there is the potential that suppliers will be paid (obligations) late and therefore incur charges. Another impact associated with late penalties is the possibility of restricted credit in the future.

Increasing risk factors
Uncollected debt is a cost to a business. The older the debt, the harder to collect.

Maintaining administrative, bookkeeping functions
Uncollected debt costs not only include the cost of the product sold and the lost profit but they also mean administrative costs ( letters, bill chasers, etc) that a seller might use to try and recoup some of the initial cost associated with the product. In other words, another impact of nonpayment is the need to chase the reluctant debtor.

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Effects of Late or Non-payments/Summary

Summary
An international credit manager must understand the principles of risk assessment since the extension of credit requires an analysis that determines the ability of the customer to pay. In addition, it is important to know credit risk features, not only the “basic” tools (the “5 C’s”) but the additional attributes of international risk (the 3 “C’s). As guardian of the accounts receivable investment, an international credit manager is the company representative who needs to know and to be able to describe how customer nonpayment impacts the company’s business.

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Effects of Late or Non-payments/Resources

Resources
Coface North America - www.coface-usa.com Credit Management Information & Support - www.creditworthy.com

Web Resources
Credit Reports Worldwide - www.creditreportsworld.com Dun & Bradstreet – www.dnb.com Experian – www.experian.com FCIB - www.fcibglobal.com Graydon America - www.graydonamerica.com Hoovers – www.hoovers.com SJ Rundt & Associates - www.rundtsintelligence.com OECD – www.oecd.org US Dept of Commerce – International Company Profile – www.export.gov

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