International Credit Risk

Regarding the latter, Howard McCourt, senior manager of National Bank of Canada’s supply chain financing solutions, warns Canadian exporters about the danger of currency fluctuations if they accept currency other than Canadian dollars. “If the currency depreciates while the seller is waiting for payment, the seller has lost money.”

McCourt suggests a hedging strategy to ensure profit margins, noting that any convertible currency can be hedged through all schedule A and B banks in Canada. Additionally, National Bank of Canada offers factoring services. “We are the only Canadian bank that is a member of Factors Chain International,” he states, referring to a global network that was created to facilitate international trade.

Factors Chain International currently has 277 factoring companies in 76 countries, including 10 in the United States. The factor purchases the exporter’s accounts receivable on a non-recourse basis which prevents devaluation during currency fluctuations. “We advance the money upfront, so exporters have no risk as long as they deliver the product as contracted,” McCourt explains.

Documentary Collection
Open account risk can also be minimized with documentary collection (D/C), as the exporter retains title of the produce until documents are accepted by the importer’s bank (collecting bank). The exporter ships the produce and provides documentation to its bank (remitting bank), which then sends the documents and a draft (bill of exchange) to the collecting bank. The documents specify requirements for transfer of title; the draft specifies how payment will be made. “Document against payment,” as its name implies, requires the importer to pay when documents are presented. “Document against acceptance” allows payment on a specified future date.

A D/C is less expensive than a letter of credit; however, exporters beware as there is no safety net. Banks serve as facilitators only; there is no guarantee of payment. “The exporter sends shipping documents to us and we would prepare our cover letter to the foreign bank,” states Beube. “The only thing the buyer’s bank does is to examine the documents to see if they match the cover letter.” They do not verify if terms of the agreement have been met, he notes.

Letters of Credit (Secured)
A letter of credit (L/C) guarantees payment by a buyer’s bank based on the buyer’s ability to pay. Risk is balanced between the parties and sellers must comply with all L/C terms and conditions to receive payment. Because an L/C is labor intensive, it is relatively expensive for both parties. It also puts a hold on the buyer’s credit, which can be a disadvantage.

Chuck Olsen, president of Chuck Olsen Company, Inc., a grower-shipper that exports citrus and grapes to Pacific Rim countries, has found that many customers are refusing to provide L/Cs or to pay up front. For over a decade, his company has been exporting product through various licensed American exporters. “The exporter takes title,” he says, “and as a result, we have coverage under PACA.”

Nevertheless, L/Cs are the most common way to secure payment in international trade. The exporter’s bank can advise sellers on payment terms, verify the authenticity of the issuing bank’s L/C, and prepare presentation instructions. However, Beube noted, “Every country has different import rules when shipping food products. The importer needs to know what Customs requires to have the product released from the port.” If this type of documentation is not included with the L/C terms, he says “the buyer has made a big mistake” as the shipment may be detained, preventing the buyer from making delivery. This does not, Beube confirms, “affect the exporter, as the bank would still pay.”