Free Online Course in International BusinessRisk and RewardTo 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."Eight C's" of Credit Risk Assessment for A Global SellerWhether 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.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. CharacterA 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.CapacityA 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.CapitalA 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.ConditionThe market's current and expected general economic situations may affect the applicants 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.
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