How to cut down Export Risks?
Exports are looked upon as high-risk high-return business.
Conducting trade transactions with a partner who’s based miles and
miles away is indeed a risky proposition. Consequently, most of the SME
units prefer to confine their trade transactions locally and look away
from exports.
As per recent reports SMEs in India contribute over 40 percent to the total exports directly and significant amount indirectly via large trading houses, or third parties. Despite their substantial contributions to exports, it may be surprising to know that today only 0.5 percent of SMEs are actually engaged in exports.
The Risk Factors involved
Issues of payment and especially the risk factor involved make SMEs wary of joining the exports bandwagon. The issue was discussed in detail under the project ‘Strategies and Preparedness for Trade and Globalization in India’s ministry of commerce. The study recommended SMEs to take the following steps to manage their payment risks and take corrective actions in case bad debts happen.
Learn more about your Buyer
The most crucial step that needs to be taken into consideration while taking care of export payment risk is to get a report on credit rating of your buyer. There are various agencies in India that provide credit rating reports on companies internationally. In fact there are many agencies that have exclusively dedicated their resources focusing on definite countries. Moreover, an SME can also approach the bank to gather information on the buyer via its banking channels. Likewise insurance companies also helps customer get the credit reports.
However, credit rating report cannot assure you that there won’t be any defaults in payments; however, it could offer an added advantage. Further, credit report on companies outside USA and European markets are not always available or are as dependable.
Generally, a credit rating report costs almost $100 to $150. Delivery time takes almost 7-10 days. For faster delivery, the costs become a tad higher. Dun and Bradstreet, Mira are some of the SMEs agencies that offer credit rating report.
Credit Insurance
The next crucial step is to get the insurance done for exports. The whole objective behind export credit insurance is to insure against payment default. ‘Trade credit insurance’ or ‘credit insurance’ is an insurance policy and a risk management product provided by export credit agencies (ECAs) to businesses wanting to protect their balance sheet asset accounts receivable from loss due to the credit risks such as protracted default, insolvency and bankruptcy.
The export credit insurance market in India is governed by Export Credit Guarantee Corporation (ECGC). After deregulation of the insurance sector, the three top global credit insurance companies Euler Hermes, Atradius and Coface have strengthened their presence in India as re-insurers. Key players in the credit insurance market in India comprise ECGC, Bajaj Allianz, ICICI Lombard, IFFCO-Tokio, New India Assurance and Tata AIG, New India Assurance and Tata AIG. The insurance cost differs from policy to policy and is priced in between 0.3 percent to 1.0 percent of annual turnover considering the bad debt history and current debt management practices.
SMEs in India should know that all credit insuring companies don’t cover risks like commercial disputes; exporter’s failure to carry out contract terms, buyers failure to obtain import license, default on the part of banks, transit loss, exchange rate fluctuations for short term, etc.
Debt Collection
Bad debt is a possible event for which businesses should always be prepared for. If such a situation arises, then assistance from debt collection agencies should be sought. Most collection agencies charge fee or percentage of the total amount involved.
Debt collection agencies in India have entered into tie-ups with many countries across the world. When an SME approaches an agency for debt collection and furnishes details of bad debts, the agency quotes its success commission against recovery. The collection agency, however, makes money only if it has successfully collected its dues from the debtor. The agency sometimes is entitled to the percentage of the debt collected, which is known as ‘pot fee’ or ‘potential fee’ on collection. However, the agency may not essentially wait for the full balance, in most cases the fee is paid off by the creditor himself if the collection efforts are discontinued midway.
The fee ranges from 10 percent to 50 percent, in addition to advanced upfront cost. In case, litigation fee is involved, the fee would be higher.
There are agencies exclusively operating in India as well as agencies having country-expertise agencies. The study suggested that SMEs should be extremely careful while zeroing down on agencies and should also consider firm’s reputation, its customer base size.
A study, published by FISME in a handbook form, covers nine India-based buyer credit report providers as well as 21 country-centric ones. It also contains contact details of 13 debt collection agencies (operating in India) and nearly 400 agencies operating globally.
As per recent reports SMEs in India contribute over 40 percent to the total exports directly and significant amount indirectly via large trading houses, or third parties. Despite their substantial contributions to exports, it may be surprising to know that today only 0.5 percent of SMEs are actually engaged in exports.
The Risk Factors involved
Issues of payment and especially the risk factor involved make SMEs wary of joining the exports bandwagon. The issue was discussed in detail under the project ‘Strategies and Preparedness for Trade and Globalization in India’s ministry of commerce. The study recommended SMEs to take the following steps to manage their payment risks and take corrective actions in case bad debts happen.
Learn more about your Buyer
The most crucial step that needs to be taken into consideration while taking care of export payment risk is to get a report on credit rating of your buyer. There are various agencies in India that provide credit rating reports on companies internationally. In fact there are many agencies that have exclusively dedicated their resources focusing on definite countries. Moreover, an SME can also approach the bank to gather information on the buyer via its banking channels. Likewise insurance companies also helps customer get the credit reports.
However, credit rating report cannot assure you that there won’t be any defaults in payments; however, it could offer an added advantage. Further, credit report on companies outside USA and European markets are not always available or are as dependable.
Generally, a credit rating report costs almost $100 to $150. Delivery time takes almost 7-10 days. For faster delivery, the costs become a tad higher. Dun and Bradstreet, Mira are some of the SMEs agencies that offer credit rating report.
Credit Insurance
The next crucial step is to get the insurance done for exports. The whole objective behind export credit insurance is to insure against payment default. ‘Trade credit insurance’ or ‘credit insurance’ is an insurance policy and a risk management product provided by export credit agencies (ECAs) to businesses wanting to protect their balance sheet asset accounts receivable from loss due to the credit risks such as protracted default, insolvency and bankruptcy.
The export credit insurance market in India is governed by Export Credit Guarantee Corporation (ECGC). After deregulation of the insurance sector, the three top global credit insurance companies Euler Hermes, Atradius and Coface have strengthened their presence in India as re-insurers. Key players in the credit insurance market in India comprise ECGC, Bajaj Allianz, ICICI Lombard, IFFCO-Tokio, New India Assurance and Tata AIG, New India Assurance and Tata AIG. The insurance cost differs from policy to policy and is priced in between 0.3 percent to 1.0 percent of annual turnover considering the bad debt history and current debt management practices.
SMEs in India should know that all credit insuring companies don’t cover risks like commercial disputes; exporter’s failure to carry out contract terms, buyers failure to obtain import license, default on the part of banks, transit loss, exchange rate fluctuations for short term, etc.
Debt Collection
Bad debt is a possible event for which businesses should always be prepared for. If such a situation arises, then assistance from debt collection agencies should be sought. Most collection agencies charge fee or percentage of the total amount involved.
Debt collection agencies in India have entered into tie-ups with many countries across the world. When an SME approaches an agency for debt collection and furnishes details of bad debts, the agency quotes its success commission against recovery. The collection agency, however, makes money only if it has successfully collected its dues from the debtor. The agency sometimes is entitled to the percentage of the debt collected, which is known as ‘pot fee’ or ‘potential fee’ on collection. However, the agency may not essentially wait for the full balance, in most cases the fee is paid off by the creditor himself if the collection efforts are discontinued midway.
The fee ranges from 10 percent to 50 percent, in addition to advanced upfront cost. In case, litigation fee is involved, the fee would be higher.
There are agencies exclusively operating in India as well as agencies having country-expertise agencies. The study suggested that SMEs should be extremely careful while zeroing down on agencies and should also consider firm’s reputation, its customer base size.
A study, published by FISME in a handbook form, covers nine India-based buyer credit report providers as well as 21 country-centric ones. It also contains contact details of 13 debt collection agencies (operating in India) and nearly 400 agencies operating globally.
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