How to Assess International Credit Risk

31 May

As it becomes easier and cheaper to do business in other countries, you may begin to look outside of the United States in order to expand your sales. While this can help your bottom line, it also brings its own set of problems that you do not typically have to deal with. Here are a few you should consider when extending international credit.

International Relations

Whether you are interested in global politics or not, understanding the trade relationship with the US and the country you wish to do business is essential. Doing business with a country in the European Union would not be overly difficult, but trying to doing business with someone in Columbia could prove far riskier. Many countries will have import taxes, or tariffs, on foreign goods and thus you should also make sure to factor this into your price and credit terms.

Legal System in the given Country

While we all hope to avoid it, a customer will sometimes not pay. If this were to happen in the US, you would have many avenues to pursue collection efforts. In a foreign market, these avenues may be drastically different or even non existent. For example, in Canada two completely separate law systems regarding collection exist depending on the part of the country you are in and in China the use of a collection company is illegal. Most countries will differ from the US in some way and it is important to understand these differences in order to assess the risk of extending credit in these countries.

Political Stability

While you will not have to worry about this in most countries, some developing nations have very volatile or corrupt political structures. This could lead to the nationalizations of industries or bribery of local politicians and law makers. Regardless of how this manifests, it is an extra layer of risk that should be factored into any credit decision that is made.

What does this means for credit?

The first steps in assessing the credit worthiness of a potential international customer are the same as any domestic one. You should look at their financial information, references, industry and market outlook, customer integrity, and all the other factors that go into a typical credit decision. Only once you have done this should you look at the international factors above.

Each one of these factors carries with it varying levels of added risk. We have found that the most important of these tends to be differing credit and collection laws. It is the one of the easiest to overlook, but can seriously affect any collection efforts you may need to use. The same can go for tariffs and other import documentation. Almost all countries will publish this information online and you should read it carefully before proceeding with any credit application. It is often worth it to contact a lawyer to help clarify any questions you may have.

We all want to expand sales and increase revenue, but you could end up hurting your bottom line if you do not fully understand all the risk of extending credit to a different country.

Here are some other great articles that should give you some more information on the risk of extending credit internationally

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