Buyer's Risks/Facilitating External Financing
|Unit 4.2-Buyer's Risks|
Facilitating External Financing
To understand the risks of external financing, the following questions need to be asked:
- What is external financing?
- How can it be viewed and understood?
- How does CAMEL play a role in external financing as it has been described above?
- What are the issues and factors that need to be considered when determining external financing?
The answers can be grouped by both commercial and political risk categories as discussed below.
Commercial Credit Risk
- Nature of the business
- Financial strength of the buyer
- Nature of the relationship with the buyer--new buyer or a frequent customer, dealer/distributor, or a subsidiary/affiliate
- Buyer’s record of meeting local and international payment obligations
- Ownership of buyer, private or public sector
- Potential loss if shipment is not accepted:
- value of the shipment (marginal pricing concept--cash invested in the goods, high or low profit at the margin)
- types of goods , perishable or specially manufactured where total loss might result if shipment were refused
- likelihood of shipment being refused-- a change in market conditions for commodity shipments may induce buyer to refuse shipment).
Sources of information to help companies identify commercial credit risk are:
- credit reports from independent agencies, banks, etc.
- customer-supplied financial data
- industry intelligence
- Political conditions in buyer’s country
- Stability of the local, state and federal governments
- Possibility of import license cancellation, or other unexpected actions that would result in the non-acceptance of the shipment
- Possibility of coup, civil disturbance, etc.
- Possibility of change in foreign exchange regulations that could delay or disrupt payment
- Economic conditions in buyer’s country including expected and recent changes
- Economic trends-- inflationary, recessionary, etc.
- Currency exchange control regulations
- Currency flow regulations
- Country’s balance of payments
Sources of information to help companies identify political and economic risks are government and private agency intelligence reports including the following:
- Chase World Guide for Exporters
- Chase Econometrics Country Reports
- International Monetary Fund Data
- World Bank Data
- CIA World Fact Book
- US Department of Commerce – Country Commercial Guides
- US State Department – Country Reports