Buyer's Risks/Facilitating External Financing
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Unit 4.2-Buyer's Risks |
Introduction | Timely Payment | External Financing | Summary | Resources | Activities | Assessment |
Contents |
[edit] Facilitating External Financing
To understand the risks of external financing, the following questions need to be asked:
- What is external financing?
- How can it be viewed and understood?
- How does CAMEL play a role in external financing as it has been described above?
- What are the issues and factors that need to be considered when determining external financing?
The answers can be grouped by both commercial and political risk categories as discussed below.
[edit] Commercial Credit Risk
- Nature of the business
- Financial strength of the buyer
- Nature of the relationship with the buyer--new buyer or a frequent customer, dealer/distributor, or a subsidiary/affiliate
- Buyer’s record of meeting local and international payment obligations
- Ownership of buyer, private or public sector
- Potential loss if shipment is not accepted:
- value of the shipment (marginal pricing concept--cash invested in the goods, high or low profit at the margin)
- types of goods , perishable or specially manufactured where total loss might result if shipment were refused
- likelihood of shipment being refused-- a change in market conditions for commodity shipments may induce buyer to refuse shipment).
Sources of information to help companies identify commercial credit risk are:
- credit reports from independent agencies, banks, etc.
- customer-supplied financial data
- industry intelligence
[edit] Political Risks
- Political conditions in buyer’s country
- Stability of the local, state and federal governments
- Possibility of import license cancellation, or other unexpected actions that would result in the non-acceptance of the shipment
- Possibility of coup, civil disturbance, etc.
- Possibility of change in foreign exchange regulations that could delay or disrupt payment
[edit] Economic Risks
- Economic conditions in buyer’s country including expected and recent changes
- Economic trends-- inflationary, recessionary, etc.
- Currency exchange control regulations
- Currency flow regulations
- Country’s balance of payments
Sources of information to help companies identify political and economic risks are government and private agency intelligence reports including the following:
- Chase World Guide for Exporters
- Chase Econometrics Country Reports
- International Monetary Fund Data
- World Bank Data
- CIA World Fact Book
- US Department of Commerce – Country Commercial Guides
- US State Department – Country Reports
