CHAPTER 7
Notes on Granting and Obtaining Credit is perhaps the greatest source of frustration for both buyers and sellers. Buyers universally wish for easy and long-term credit to give them time to resell products and make payment to the seller, while sellers universally wish for immediate payment so they can avoid credit risk and pay their own costs of production. The realities of business force many firms to grant credit terms to the buyer. Both the buyer and seller understand that credit terms can lead to increased sales and profits for both parties to the transaction. Granting credit, however, is a process fraught with risk. This chapter outlines some of the opportunities, risks, and procedures for granting and obtaining credit.
THE FINANCING OF TRADE
Granting Credit Most principles of domestic credit management apply to export credit management as well. Exporters will grant credit terms only to those firms it deems able and willing to pay the full amount on time, as agreed. International transactions, however, add layers of uncertainty to the credit decision. Unknown firms, far away countries, different languages and cultures, foreign exchange risk, and political and economic risk all play a part in the decision. Sellers should follow the same careful credit principles they follow for domestic customers. Some clients will be accepted for credit terms while others will not. The first step for sellers is to establish a written international credit policy and to adhere to it and to review it in light of actual experience. The terms of payment granted in a given case will depend on the situation: the relationship between the seller and the buyer; the credit worthiness of the buyer; foreign exchange considerations; and the political, economic, and social stability of the buyer’s country. Sales to an unfamiliar buyer in a developing country will call for prepayment or a confirmed letter of credit. Sellers should also manage the credit period as a key cost of the transaction. If the buyer is not responsible for directly paying carrying costs, the seller should factor them into the selling price. The credit policy should be appropriate for the individual company, the industry in which it operates, the size of sale contracts, the margin of profit on individual sales, the stability of the market, the stability of the customer, whether sales are one time only or repeat sales, frequency of sales to each customer, and minimum information upon which to base a decision. CREDIT PERIOD
A useful guide for determining the proper credit period is the normal commercial terms in the seller’s industry for internationally traded products. Buyers generally expect to receive the benefits of such terms. With few exceptions,
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