Export Risks

Risks involved in international transactions?

• Delays in payment or non-payment.

• Loss due to exchange rate variation.

• Loss or damage in transit.

• Increase in transportation costs.

How are currency fluctuations a risk when it comes to international transactions?

• Exchange rate risk refers to the risk that a company's operations and profitability may be affected by changes in the exchange rates between currencies.

• Companies are exposed to three types of risk caused by currency volatility; transaction exposure, translation exposer and economic or operating exposure.

• The risks of operating or economic exposure can be alleviated through operational strategies and currency risk mitigation strategies, such as hedging.

• In the current globalised market, exchange rate risk affects not only multinationals and businesses that trade in international markets, but also small and medium-sized enterprises.

How is non-payment of monies a risk when it comes to international transactions?

• A financial risk is not receiving payment from the customer after incurring costs and possibly providing the goods or services.

• Unlike a domestic transaction, it may be very difficult to track down a customer that has paid in another country and difficult to find legal recourse to recover the debt.

• It can take longer to get paid for exports than for sales to domestic customers. You may not be paid in full until the products or services have been delivered. Transporting goods to other countries can be slow; there may be weeks between dispatch and delivery.

• The longer the delay between providing the goods or services and payment, the higher the risk of non-payment. This has an impact on cash flow.

What are the strategies for minimising financial risk in export markets?

• Documentation

• Marketing

• Insurance

• Hedging

(Strategies for minimising financial risk) There are a few documents that can be used to manage the risks involved in international transactions:

• Documented proof of transaction

• Documentation letter of credit

• Documents against pay

• Official financial documents

(Strategies for minimising financial harm - documentation) Documentation letter of credit:

• Before an exporter sends goods overseas, they need to be sure that the customer will pay for them. Documentary credit is a form of guarantee that the money will be paid.

• The letter of credit will detail terms that must be met before payment is made.

• Terms could include the goods arrive as ordered, without damage and within a certain time. If these terms are met the bank will transfer the money to the exporter's bank.

• If the customer does not have the funds in their account, their bank will make the payment to the exporter then chase the customer for reimbursement.

(Strategies for minimising financial harm - documentation) Documents against payment:

• An exporter receives an order from the customer. Goods manufactured or sources as per the order.

• The exporter uses their bank to send a bill and any documents that will allow the buyer to collect the goods to the customer's bank.

• The customer's bank will give the documents to the buyer only after payment is made.

• The customer makes the payment to their bank and it is forwarded to the exporter's bank.

(Strategies for minimising financial risk) Which of the following are types of insurance in exporting?

• Export credit insurance

• Overseas transaction insurance

• Political risk insurance

• Transit or shipping insurance

(Strategies for minimising financial risk) Which of the following points are true for insurance?

• The three types of insurance in exporting is export credit insurance, political risk insurance and transit or shipping insurance.

• A way to encourage people to buy goods is to offer generous credit terms.

• Credit terms overcome the obstacle of the customer not having the funds to pay for the goods. But there is a risk to exporters when they give credit to customers.

• It is the same risk that businesses face when selling goods domestically, but it is more difficult to chase payments when you're dealing with customers in other countries.

(Strategies for minimising financial risk) Export credit insurance:

• Businesses undertaking international transactions can also use this type of insurance to mitigate unexpected losses.

• Export credit insurance is a way for exporters to prepare for possible bad debts. For example, an Australian company sells goods to a company in China on credit.

• Before payment is made, the Chinese importer is declared insolvent and unable to pay its debts. If the exporter has credit insurance the insurance company will pay the business what it is owed.

• If an Australian exporter is selling goods to customers in countries that have civil unrest or wars, they can insure against non-payment and loss or damage to goods.