Last year, the U.S. exported a record $137 billion worth of food. Indeed, food has always been one of America’s leading exports, with grains accounting for the vast majority of products shipped.
But lately, the U.S. has been exporting a lot more non-bulk value-added foods like meats, fruits, vegetables, poultry, and nuts. Processed foods like food ingredients, beverages, frozen foods, and dairy accounted for $50 billion alone in 2011.
The vast majority of these products are going to countries with fast-developing middle classes. For example, food exports to China are up 689 percent since 2001. Likewise, food exports to South Korea are up 100 percent; Indonesia 133 percent; and Turkey 250 percent. According to projections by the USDA, the middle classes outside of the U.S. will grow 138 percent by the year 2020.
Despite this tremendous market potential, a lot of small- and medium-sized American food companies do not export. Why? At the very least, it’s a pain in the neck. At its worst, it could spell the end of a company.
Sending products overseas means dealing with not one, but two sets of government bureaucracies, different languages and legal systems, additional taxes, unexpected tariffs and a host of risks such as currency risk, market risk, transportation risk and political risk to name a few.
And then there is the greatest risk of all for exporters—trade credit risk. Will your overseas customers pay? What if they default, go bankrupt, or just refuse to pay? For most companies, their accounts receivables are among their largest assets. Just one big unpaid bill could spell doom.
Traditionally, U.S. companies have addressed trade credit risk in one of several ways. They each have their advantages and disadvantages:
Cash in Advance. Cash on the barrelhead, while effective in limiting credit risk, is also highly effective in limiting sales. It’s a buyer’s market. Without credit terms, customers will simply go elsewhere.
Self Insurance. Offering open terms makes for good sales, but leaves the seller exposed. In the overwhelming majority of cases, customers do pay. But what if they don’t pay on time, or pay just part of what they owe, or not pay at all? Could your company survive a 25 percent hit to its value?
Documentary (or Draft) Collection. In this method, goods are shipped to the country of destination and the shipper or a bank holds the paperwork until the buyer pays the bill. However, this method is only partially effective. What if the buyer can’t or won’t pay? Now you’re stuck with a shipment overseas.
Export-Import Bank. The ExIm, along with the USDA, have programs to insure against credit risk. While these programs are effective, it’s important to remember that their requirements, such as limits on foreign content, methods of shipment and/or exclusion of certain types of services often don’t fit the needs of many exporters.
Letters of Credit. LCs require the involvement of two banks, lots of administration, and careful adherence to processes, which require repeating with every transaction. Because letters of credit tie up a customer’s bank account, demanding one can put a U.S. company at a competitive disadvantage. If you were a customer considering suppliers and one was willing to give you 90-day credit terms and the other asked you for a letter of credit, which would you choose? With plenty of competitors vying for their business, customers can go elsewhere.
Fortunately, there is another alternative that has none of the drawbacks—trade credit insurance.
For a cost that amounts to a small percentage of sales, exporters can insure their accounts receivables. If an overseas customer cannot or will not pay for whatever reason—political upheaval, catastrophe, bankruptcy, fraud—the seller still gets paid. Trade credit insurance is quick, affordable, tax deductible and most importantly, easy. Policies can cover export sales alone or all of your transactions, foreign and domestic.
To underwrite, trade credit risk insurers must have an intimate knowledge of local conditions. They are experts in areas such as country risk: Is the business environment stable? Currency risk: Is money traded fairly and efficiently? Transparency: Are the courts fair?
Then, of course, there is the creditworthiness of the customers. What is their payment history? Have they ever defaulted? Have there been judgments against them? What is their condition today? The larger credit insurers collect and constantly update the credit histories of literally millions of foreign companies.
With the threat of credit risk removed, U.S. exporters can concentrate on sales. They can offer terms equal or better than those offered by competitors.
Food exporters also find that purchasing trade credit insurance improves their financial profile and borrowing power. Lenders are more likely to advance working capital at lower cost when receivables are protected. Lower interest rates enable exporters to pass the savings on to customers or keep it for themselves.
In addition to making sure exporters get paid, some credit insurers even provide their customers accounts receivable management services. Essentially, they become a company’s foreign credit and accounts receivable department. Some of the larger insurers also provide collection services.
So, while there are many ways exporting companies can manage their credit risk, only one, trade credit insurance, provides users a competitive advantage with benefits such as up-to-date knowledge of a customer’s creditworthiness, a clear understanding of the local business climate, speed to market, market intelligence, a stronger financial position, and the ability to offer better terms to customers.
With payment assured, U.S. food exporters can concentrate on sales and provide new and existing customers with better terms. And, better terms mean more sales.
Kerstin Braun, PhD is executive vice president of Coface North America, a subsidiary of $2.2 billion global credit insurer, Coface. She can be reached at Kerstin_Braun@Coface.com.