The Importance of Credit Risk Analysis on Export Accounts

In a world that continues to advance and become more integrated than ever before, it is important to recognize the risk associated with this globalization. Globalization is the process of increasing cross-border interaction and assimilation of various aspects of human activity, particularly through trade and financial flows. Companies increasingly do business abroad to diversify and expand their sources of revenue and profitability. As such, a credit professional should understand the aspects of international credit risk. Aside from commercial risk, the two main types of risk in international sales are political and sovereign.

Political risk can be defined as the risk an investment’s return could suffer as a result of political changes or instability in a country. For example, a change in government could lead to discriminatory regulations, contract breaches, currency alterations, or even civil war. If you are wondering if there is an increase in political risk on a global scale, the answer is yes. Between 2007 and 2015, the number of conflicts increased twofold. These events can place downward pressure on your customer’s profits and / or business goals, which in turn could hurt your company’s bottom line.

Any risk arising on chances of a government failing to make a debt repayment or defaulting on a loan is called sovereign risk. The strength or weakness of a country’s banking system, in addition to the depth of its capital markets, are important factors to monitor. Debt obligations have the potential to become a fiscal burden or impair fiscal flexibility. Should a government fail to repay its obligations, it could send its country into a tailspin, having a negative impact on global markets as a whole.

After assessing the above risks, what might a credit professional consider to mitigate such risks? Letters of credit (“LC”) are typically used in international sales, as they provide an increased level of security for both parties. Essentially, letters of credit are “a method of shifting the credit risk from the customer to a financial institution issuing the LC” (Journal of Business Credit). This means that the issuing bank has agreed to cover the transaction and that the seller will be paid subject to meeting the conditions noted in the letters of credit. However, we note letters of credit are costly.

EXIM Bank (Export-Import Bank of the United States), is also another option in this situation. EXIM works with private banks so exporters can secure financing for overseas sales through a working capital loan guarantee. We see many companies choosing credit insurance as a means to eliminate the need for letters of credit, to level the competitive playing field, and offer attractive open credit terms with foreign customers. Export credit insurance will protect your business from non-payment of commercial debt.

Financial and political woes can have significant implications on a company’s business. Although this is often overlooked, a credit professional needs to understand how it could influence their international customer’s credit profile.

Sources: ProfitGuard, Coface, and Standard & Poor’s 

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The Importance of Credit Risk Analysis on Export Accounts

Collection from Slow Payers- The Art of Persuasion

While it’s not unusual to encounter slow paying customers, it’s important to be watchful for a slow pay situation that typically foreshadows real payment ability problems.

Having established collections processes will help assure that the routine, “non-credit risk” payment issues are addressed in a timely manner.  It’s also important to have that next set of steps to pursue if a payment problem develops.  Incurring collections fees or filing a claim under your credit insurance policy comes with certain costs that you may be able to avoid if you employ some interim steps to assure you’ve first exhausted your best attempts to get paid.

At GCC, we provide a cost-free demand letter service to our clients.  This very effective tool has been used by countless clients over the years, helping them avoid unnecessary collections costs and claims filings.  A demand letter from a third party allows you to take the role of problem solver and let that third party be the “bad cop”.

Most recently, a client was having difficulty collecting a $188k balance that had aged out to 6 months old.  We prepared a demand letter advising our client that upon review of their current aging, we found the amount was significantly past due and per the terms of their credit insurance policy, they would be required to file the account with the carrier for collection action and by doing so, negatively impacting their customer’s credit profile.  The client shared the letter with their customer and received an almost immediate response indicating that full payment was on the way.

While this approach does not work in every case, we’ve found that if the customer has the funds, these demand letters are very effective at getting you paid.  We’d invite you to talk with your agent or client service representative to discuss this approach if the need ever arises.  We’re always happy to help.

(248) 646-9400  www.gccrisk.com 

Collection from Slow Payers- The Art of Persuasion

Rising Interest Rates Pose Threat to Credit

Benchmark interest rates have steadily risen after a decade of slow economic recovery and are expected to continue to rise.  Some economists anticipate four rate increases from the Fed for all of 2018.  Debt is becoming more expensive, which will certainly put more pressure on companies who are heavily reliant on debt to capitalize their businesses. Short-term Treasury yields are rising rapidly and long-term yields, while slower to rise, are seeing increases as well.

Interest expense is an important consideration when evaluating credit risk.  As a result of higher borrowing costs, companies, especially smaller-sized enterprises who aren’t generating enough cash flow to cover their debts, are at increased risk of defaulting on their payments and may eventually fall into bankruptcy.

So, how does this effect corporate credit? In the face of a robust economic climate and rising interest expense, companies find cash flow strained and working capital constrained. Higher borrowings put more pressure on the company’s liquidity. The effect of these financial issues then travels down the supply chain in the form of slower payments to vendors and in some cases unexpected insolvencies. If customers do not have sufficient cash flow to cover their expenses, they begin defaulting on payments to their suppliers. Suppliers then have difficulties absorbing these defaults while still trying to cover their operating expenses, and the risk travels down the line creating a domino effect of slow payments and defaults.

Credit insurance provides protection against past due defaults and insolvencies so you can continue uninterrupted after losses occur. The policy replaces the lost revenue protecting your critical working capital and cash flow. Many credit insurance users also find that it allows you to lower your bad debt reserves with the certainty that comes with the carrier’s assurance of payment. With credit insurance, you will be able to take excess bad debt reserves back into income, allowing you to provision less and giving your earnings a onetime boost.

In short, in times like these, credit insurance will not only help protect your working capital and bottom line, it can also be used to gain financial efficiencies that help free up capital within the business that may otherwise be tied up in bad debt reserves.  Feel free to talk to us today to learn more.

(248) 646-9400 http://www.gccrisk.com

Sources: USA Today, CBS News, Global Commercial Credit

 

Rising Interest Rates Pose Threat to Credit

Borrowing Enhancement for Better Access to Working Capital

Maximizing access to working capital is a top priority. Ideally, a firm could use additional cash tied up in their receivables to internally support their working capital and cash flow needs. However, most firms don’t have easy access to this cash.

When it comes to credit insurance, most recognize it for its benefit of catastrophic loss protection. However, the benefits extend far beyond this. Recently, we have noticed an increase in the number of companies seeking to better leverage their receivables to gain access to more working capital. Credit insurance can help unlock additional funds tied up because of lending limits due to large concentrations, slower paying customers, export customers, etc.; in other words, receivables that aren’t usually included in the borrowing base. Credit insurance provides both the company and their lender with protection to both increase the percentage advanced against insured accounts and allow ineligible receivables into the borrowing base.

Credit insurance users can expand their working capital by better leveraging the same base of receivables, while lenders have the advantage of targeting advance rates to their specific requirements. Credit insurance indemnifies both the client and lender beneficiary in a borrowing arrangement and can help expand access to funds tied up in accounts receivable.  Please don’t hesitate to contact us if you would like to learn more.
Borrowing Enhancement for Better Access to Working Capital

It was nice while it lasted: Credit outlook weakens once again

According to the National Association of Credit Management (NACM) Credit Manager’s Index report, “data has fallen off from the pace that was set in April. The combined index reading fell from 55.8 to 53.6 last month, the lowest it has been since last November” (Fusco, 1). Favorable factors fell from 63.6 to 60.0 and unfavorable factors fell below the 50-range at 49.3, the lowest it has been since last August, which raises a big concern (Fusco, 1).

As presented in Figure 1, most favorable categories slipped out of the 60s range last month. You can see changes in the sales, new credit applications, and dollar collections categories. This resonates concern from March when there was a similar decline in dollar collections (Fusco, 1). NACM Economist, Chris Kuehl, Ph.D. states “There has been some hope that dollar collections were trending back up and that this was a signal that companies were starting to think expansion again. Now we’re not so sure.”

Combined Manufacturing and Service Sectors
Figure 1 May 2017 NACM Credit Manager’s Index Report
Combined Index Monthly
Figure 1 May 2017 NACM Credit Manager’s Index Report

The rise in rejections of credit applications, in the unfavorables category, could be a result of two things, says Kuehl. “Either applicants that are trying for additional credit are in good shape or those that issue credit are being more generous.” Other changes in unfavorable factors are also demonstrated in Figures 1 and 2.

A specific factor to highlight is the collapse of the dollar amount beyond terms, which fell 51.0 to 45.9 from April to May. “The combination of more slow pays and weaker dollar collection means that there are still considerable struggles in terms of paying and there is renewed worry that other negatives will start to accelerate,” says Kuehl, “the sense right now is that companies are less upbeat than they were earlier in the year. The big growth opportunities have not materialized yet, but there remains some hope they will.

Information derived from the May 2017 Credit Manager’s Index Report by the NACM

For more information, see the full report.

 

It was nice while it lasted: Credit outlook weakens once again

The New GCCrisk.com

BINGHAM FARMS, MI (December 13, 2016)-Global Commercial Credit (GCC) is excited to unveil a newly upgraded website www.gccrisk.com. The redesign incorporates a new modernized look, complete mobile accessibility, and an improved front-end user experience. In addition, the company is currently celebrating its 20th year in business.

As part of the website update, GCC has highlighted what makes them unique from other specialist brokers in this field. 200+ years of combined experience in trade credit insurance and finance is a distinct advantage. The deep and experienced service team and claims and recovery team along with experienced financial analysts are unique in the brokerage side of the industry as well. GCC has developed a proprietary service model that is unmatched in the market place.

“The very essence of our business is service and support. A lot of companies talk about service. We live it every day. Like we say on our new site, it’s in our DNA,” said Craig Bonnell, President.

GCC’s web development team, Wade Pressel-Senior Designer and Steve Flake-Project Manager, at Mecury Studio (http://mercury.team/), have developed the new design over the past two months to create a more attractive and accessible platform.

“It was important to Mecury Studio that the new Global Commercial Credit website be a showcase of GCC’s expertise while properly presenting the services and people that make GCC so great. The new website is more than just a new look, it is a bottom-up rebuild that will make a strong impression on current and potential clients and allow for users of the website to get the information they need in the most efficient way possible,” said Flake.

 

 

 

The New GCCrisk.com

Global Corporate Defaults Highest in 7 Years

As of mid-September, global corporate defaults have risen to 122, about a 54% increase from September 2015. Although it is nothing like the spike in 2009, 2016 has seen the highest number of global corporate defaults in seven years.

“The recent activity keeps 2016 well ahead of the 2015 pace-there were 79 defaults at this point in 2015- though well behind the dark days of 2009, when there already were 220 defaults by this point in the year,” said Tim Cross, contributor of LCD News.

Since 2004, the U.S. has been the leader in number of corporate defaults-with about 80 defaults or 60% of the total in 2016 thus far. Over the last three years, U.S. defaults alone have continued to increase-about a 67% increase just from 2015 to 2016. In comparison to other regions in 2016, such as Europe (about 10), Emerging Markets (about 25), and Other Developed (about 12). During the first week of September, four U.S. issuers defaulted (Vassa,Kesh,Serino, “S&P Global Fixed Income Research).

default-rate-projection1

What does this mean for 2017? Especially for the U.S. According to S&P Global, the U.S. default rate will likely climb 5.3% by the end of 2017’s first quarter, from 3.8% at the end of the first quarter this year (Tim Cross, “S&P Global: US High Yield Default Rate Expected To Hit 5.3% By March 2017”). When we say 5.3% we mean around 93 U.S. corporate defaults for the first 12 months ended March 2017 (Tim Cross, “S&P Global: US High Yield Default Rate Expected To Hit 5.3% By March 2017”).

To learn more about how you can effectively mitigate the risk of corporate default visit www.gccrisk.com or call (877) 422-7475

 

Sources:

Vassa, Diane, and Sudeep Kesh and Nicole Serino. “S&P Global Fixed Income Research.” S&P Global Market Intelligence, 29 Sept. 2016, https://www.globalcreditportal.com/ratingsdirect/Login.do?msg=InvalidLogin&redirUrl=%2FshowArticlePage.do%3Frand%3DRU0XOxULWQ%26object_id%3D9797499%26rev_id%3D1%26sid%3D1711620

Cross, Tim. “S&P Global: US High Yield Default Rate Expected To Hit 5.3% By March 2017.” Forbes, 29 Sept. 2016, http://www.forbes.com/sites/spleverage/2016/05/10/sp-us-high-yield-default-rate-expected-to-hit-5-3-by-march-2017/#6c1e529b35d6

 

Global Corporate Defaults Highest in 7 Years