Like any business, import lenders look to minimise their risks. In this case there are 2 key areas of potential risk. The first is your company – 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.
- Sales Risks: A second major risk is whether you can easily sell the imported goods. You will need to provide convincing evidence that there is a market for the goods you want to import. If you already have advance orders for the goods, it will be easier to raise the finance.
- Customs process risks: You’ll also need to consider what custom duties and documents are required and whether there are any obstacles to this process. Countries that have a reputation of 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: They want to check that your insurance covers all the risks associated with international trade. In particular is must adequately address the laws and regulations of both the sending and receiving country and the cover all stages of the supply chain involved in a safe delivery of the imported goods.
- Currency controls risks: Fluctuations in the exchange rate can have a devastating impact on imports. This is particularly true of large volume import 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. Import lenders will usually insist that you are insured against exchange control fluctuations.
- Quality of the Supplier: For an import lender, the standing and creditworthiness of the supplier is just as important as the importer’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 supplier’s bank is also important, because it forms the other part of the bridge through which the money and goods will flow. Then the credentials of the supplier 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 importer, 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 receive the goods 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. Try to negotiate that the goods themselves serve as collateral for the finance. Lenders will insist on insurance that covers the entire supply chain of the imported goods including insurance against foreign-exchange fluctuations.
- Credit rating of business owners: One of the ways lenders assess their risk is to look at the business owners’ credit rating. They are looking to see whether you are the type of person who manages your money well and has a history of repaying debt.
- Assets and liabilities of business owners: Lenders also lessen their risk by requesting business owners to 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. This must include a list of all personal sureties signed by any of the owners. Wherever possible you want to avoid signing personal surety and rather find alternatives to raising collateral. This could be by using the imported goods themselves as surety or investigating whether the Khula Credit Indemnity Scheme would be applicable to guarantee a large portion of the required collateral. Read the module What to do when you don't have collateral.
Preparation for a loan application
Knowledge of imports
It can be worth contacting your local Trade and Investment office as they run import and export training courses for small businesses and these 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 1 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 BEE Certificate is available. Some of the private finance companies require this, but not all do.
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