| Export credit is an issue companies ignore at their peril |
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| Credit insurance is an issue that companies ignore at their peril. Unfortunately, all too many do just that, relying on an over-confidence in their own knowledge of their overseas customers. |
By Eamon O’ Neill
Credit insurance is an issue that companies ignore at their peril. Unfortunately, all too many do just that, relying on an over-confidence in their own knowledge of their overseas customers.
As a householder, you do not cancel your fire insurance just because the house has never gone on fire. Similarly, as an exporter you should not dismiss credit insurance simply because you have never had a major bad debt problem.
If a bad debt is capable of bringing down your business, then you should have credit insurance. It is as simple as that. And the further away from Ireland that you are trading, then the more you need protection, even if you appear to be dealing with blue chip companies. If businesses like Bell Lines can go into liquidation, then any company can.
Credit insurance, of course, is no substitute for good credit management. But any company trading abroad is vulnerable to the risk of bad debts. Credit insurance can give you the protection you need to ensure that this exposure does not jeopardise your overall business.
I have almost 20 years’ experience dealing with credit insurance claims all over the world, as far afield as China and South America. Here are a few basic guidelines which every exporter should bear in mind.
Some may appear self-evident, until you are caught out. Others are less obvious, but in my considerable experience equally important.
The first and most fundamental guideline is never to take an order over the phone. You must make sure you receive either a letter, a fax or an e-mail before you start shipping goods. Otherwise you will have no way of proving an order has been made. This seems so obvious that it is hardly worth mentioning.
But we all have a streak of greed in us. And if a large order comes in at the right time the temptation is there to put any doubts you may have about the creditworthiness of the customer to the back of your mind, particularly if the order comes at the right time for your monthly sales figures.
Far too many Irish smoked salmon processors, for example, have been caught out in the run-up to Christmas by orders made over the phone, particularly from Italy; when they chase up payment in the New Year, the customer has vanished! I remember on one occasion a client accepted an order from a fish-and-chip shop!
The second basic rule is to ensure that, if you either are delivering goods yourself or an employee of yours is delivering them, you receive a CMR (document of acceptance) for every delivery. This documentary trail of evidence could be critical in chasing up bad debts later on.
The third basic rule is to make sure that, if relevant, you have proper legal provision for retention of title in the event of your customer going into liquidation. For retention of title to be effective, there has to be written acceptance by the buyer that he recognises the principle.
Too many Irish exporters pay insufficient attention to this and simply buy an ‘ off the shelf’ retention clause from their solicitor. This more often than not is insufficient. You should get a proper written contract drafted that is relevant to your particular line of business.
Proper attention to retention of title means that, particularly in Germany where the law is very supportive in this regard, the exporter can prove he is the legal owner of any goods until they are actually paid for, even if they are lying in the customer’ s warehouse. A little bit of extra effort now can save a lot of pain down the road.
Another fundamental principle of credit management that tends to be overlooked is the need to register a debt in the event of a customer going into liquidation. A lot of traders just don’t bother but, five or six years down the line when the liquidator is finished his work, only a registered creditor will share in whatever dividend is paid out.
Exporters should also be wary of orders from new customers who, although they may offer impressive documentary proof of their creditworthiness, have recently changed their line of business. In recent years, many traders have found themselves the victims of organised crime in this sort of situation.
The classic scenario features a small, established business with an impeccable credit record. It is taken over by organised crime and branches out into a completely new field of business. But when suppliers, who have been lured into a false sense of security by the company’ s officially filed credit ratings, come chasing their money, they find both their goods and the criminals have flown.
It is also important to remember that a guarantee of payment issued on behalf of one company by another company has no legal validity unless it is first registered in court as a charge against the guarantor. Many traders have assumed that a simple letter of guarantee from, for example, a parent company is sufficient. This is a false, and often expensive, assumption.
Irish exporters must also pay attention to the peculiarities of the particular market they are trading with. It is not just the language that varies from country to country; the law and the business culture can vary enormously too.
There are some countries that we would recommend exporters not to deal with at all and others where we would recommend extreme caution. Even within the EU, trading abroad can be a bureaucratic minefield unless you know what you are doing. Where possible, it is advisable to either speak the language yourself or have an agent who does.
As credit insurers, we are in the risk business; therefore we have expert knowledge which we can and will share with our clients. In any given year, between ?1-2 billion worth of new exposure comes into us. Of that, about 20 percent will be declined and in the case of another 22 percent we will offer only partial cover.
Now, if we decide not to insure your business or offer you only partial cover, it’ s not because we don’ t want to. It’ s simply because, based on our own analysis of the market and the customer, the risks are too high to do anything else.
We analyse any request for cover according to a number of criteria: the market sector, country, financial strength of the customer, terms of payment, size of the order and, above all, the exposure. But we also take into account other exporters’ experience.
Traders insured with us are obliged under the terms of their policy to report overdue accounts. We filter these, determine what’s serious and what’ s not serious and are therefore able to operate what is in effect an early warning system for other exporters.
So when a trader takes out a policy with us, they gain access to not just our information and experience but also that of our other clients. And, unlike a credit rating organisation, which provides historic information that could be several years out of date, our information is current and relevant. |
Eamon O’ Neill is claims manager of Credit Insurance, with Allianz Church & General.
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| Article appeared in the October 2000 issue.
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