Like any business, export lenders look to minimise their risks. In this case, there are two key areas of potential risk. The first is your company, as they want to examine the possible risks your company poses before they approve finance. The second major risk area is that of international trade.
The list below briefly outlines the major risks to international trade:
Risks of international trade
- Political risks: Countries that are considered to be politically unstable are high risk for lenders. Countries that have a high corruption index are also considered high risk. Credit Guarantee Insurance Corporation (CGIC, the largest credit insurance firm in South Africa), classifies countries from the least risky (1A) to the most risky (3C). The number refers to the political stability of the country. The letter describes the payment culture in the country: “A” representing a good payer, while “C” represents a bad payer. If for instance, you were dealing with a 1A country and have taken insurance with CGIC, then CGIC would pay you out 90% if the deal didn’t materialise because the client failed to deliver the goods. Some countries, such as Zimbabwe, carry no number or letter, which makes them uninsurable. In other high-risk countries, CGIC will only insure on the basis of a letter of credit.
- Payment risks: A second major risk is whether you can easily collect your money. So you need to consider whether there are costs associated with collecting the money. The reputation of the company that will be buying the exported goods is critical here as lenders assess the risk based on their knowledge of the receiving party.
- Customs process risks: You’ll also need to consider what customs duties and documents are required and whether there are any obstacles to this process. Countries that have a reputation for corruption at border posts are considered to be high risk.
- Transportation risks: Transporting the goods is another consideration, as is insuring them. The method and the route selected for the export of the goods will be evaluated. Each type of transport has its own risks, as does the route that will be used.
- Insurance risks: Insurance to cover as many of the risks as possible will be necessary, and the cost of this should be included in the total cost of the exported goods.
- Currency controls risks: Fluctuations in the exchange rate can have a devastating impact on exports. This is particularly true of large volume export contracts that are completed over a period of time. A change in the exchange control rates will impact heavily on the profitability of the contract.
- Quality of the buyer: For an export financier, the standing and creditworthiness of the buyer in the overseas country are just as important as the exporter's financial strength. It starts with the country itself. The closer it is to being a developed country with a strong, efficient legal system and an open economy, the more favourably the lender will view the deal. The standing of the overseas buyer's bank is also important, because it forms the other part of the bridge through which the money and goods will flow. Finally, the credentials of the buyer will be carefully verified.
Risks involved with lending money to businesses:
Stability and sustainability: These are big issues for lenders as they want to ensure they will be able to recover their money. As a result, they check:
- The business' credit history.
- The business' trading history.
- The business' bank accounts to see how the money is spent.
- The business' annual financial statements.
- The business' current financials.
Experience: If you are a first-time exporter, you could be seen as a high risk. International trade and delivery logistics are full of potential problems and they will want to know that you have fully researched this project and will be able to complete without encountering problems that could cause you to lose money.
Collateral and insurance: As with all commercial loans, you will be expected to provide collateral in order to secure the loan. The banks, in particular, will expect collateral. Try to negotiate that the goods themselves serve as cover for the finance. Some of the government incentive schemes are more lenient and will work on a case-by-case basis to decide on collateral amounts. Many financiers will insist on insurance of the exporter goods, credit insurance against non-payment of the overseas client, and foreign exchange insurance against currency fluctuations.
Credit rating of business owners: One of the ways lenders assess their risk is to look at the business owner's credit rating. They are looking to see whether you are the type of person who manages their money well and has a history of repaying debt.
Assets and liabilities of business owners: One of the ways lenders lessen their risk is to demand that business owners sign personal surety. This means that they can attach your personal assets (for example, your house or car) in the event that the business does not repay the loan. Therefore, they want to see a list of assets owned by each business owner as well as what they owe.
Please read the module on Understanding Personal Surety before you sign documents.
Preparation for a loan application
Knowledge of exports
It can be worth contacting your local trade and Investment office as they run import and export training courses for small businesses and this will help you understand the business rules and processes of international trade. The Department of Trade and Industry (the DTI) has a list of the contact details for their provincial trade and investment partners.
Click here to locate your nearest trade and investment office.
You are entitled to one free credit rating per year, so you can apply for your personal credit rating in advance of the loan application. This gives you time to make any adjustments if required.
Make sure that you have an updated tax clearance certificate. It will be required by all lenders.
Government grants and incentives require the submission of a BEE certificate, so make sure that a current one is available. Some of the private finance companies require this, but not all do.
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