A Primer on Export Credit Policies

By Michael C. Dennis

This is a primer or guide relating to export credit policies. Not all policies outlined here may be suitable for every company or every export scenario, but they provide a foundation for effective credit management of most export sales:

• ·?????? Supervision and Coordination: The credit department operates under the supervision of [Supervisor's Title], with coordination aligning with overall corporate policy and the sales department's activities.
• ·?????? Primary Goal: The primary objective of the export credit policy is to avoid extending credit to foreign customers incapable of meeting their obligations. It encompasses guidelines for credit granting authority, customer credit applications, and credit checks, directly impacting profitability and cash flow.
• ·?????? Balancing Risk and Reward: Striking a balance is crucial. Overly strict credit policies may deter potential profitable customers and slow sales, while overly liberal policies can attract slow-paying customers and increase bad debt losses. Our goal is to maximize profits while minimizing delinquencies and bad debt loss.
• ·?????? Continuous Review: This policy will need to be periodically reviewed and updated to attract and retain creditworthy customers without adversely affecting cash flow and profits. Export credit decisions consider factors including an evaluation of customer credit risk meaning the risk of slow payment or default, a country risk assessment, the dollar amount of the sale, the credit limit, our profit margins, and the accurate understanding of this company’s credit risk tolerance.
• ·?????? Suitable Terms: Within prudent credit practices, the credit department intends to find suitable payment terms for every customer presented for evaluation by the sales department. The credit department has the final say on what constitutes a suitable credit risk and about the related payment terms and credit limit.
• ·?????? Resolution of Disputes: In case of disputes between sales and credit regarding a company's creditworthiness, [Supervisor's Title] will make the final decision in consultation with the CFO and the VP of Sales.
• ·?????? Factors to be Considered: The credit department assesses each export sale and each foreign customer by evaluating two key factors which are: (1) the risk of payment default due to the customer's financial condition and (2) the risk of government actions in the buyer's country (country risk) affecting payment.
• ·?????? Credit Application Requirements: Unless a foreign customer is a publicly-traded company or is otherwise well-known to the credit department, an applicant company requesting open-account terms must provide three U.S. trade references and a bank reference. For credit limits exceeding $xxxx, the applicant must provide also their two most recent year-end financial statements.
• ·?????? Letter of Credit (L/C) Terms: If the terms of sale are determined to be letter of credit, the credit department will send the applicant our standard L/C instructions. Only credit department approved changes to these terms will be accepted. Product shipment occurs upon receipt of a certified copy of the acceptable original L/C, provided the issuing bank and the terms contained in the L/C are acceptable in all respects to this company.
• ·?????? Collections and Past-Due Accounts: The assigned collector will contact foreign customers with past-due balances at least once weekly. Any foreign customer accounts over 30 days past due will be reviewed with the credit manager or their designee every two weeks. Credit holds will be considered after an account is 30 days past due and imposed automatically if an account exceeds 45 days past due, unless overridden by the credit manager.
• ·?????? Account Updates: Every active account must be updated annually. Accounts with credit limits exceeding $100,000 must be updated semiannually, and those exceeding $250,000 shall be updated and reviewed quarterly.? Any significant changes in a customer's financial condition or payment history may trigger an interim review. The credit department will adjust credit limits as necessary to reflect changing circumstances.
• ·?????? Currency and Legal Compliance: Sales to foreign customers (and invoices we generate) must be in U.S. dollars, and L/C terms must mandate payment in U.S. dollars.
• ·?????? Legal Requirements:? We are committed to complying with every applicable law governing export sales, including the Foreign Corrupt Practices Act, the various Federal Anti-Boycott laws, as well as export control regulations. Anyone with authority to release orders or approve credit terms must demonstrate detailed knowledge of these federal regulations.
• ·?????? Credit Insurance: To mitigate credit risk, the credit department shall explore and potentially utilize credit insurance for high-value accounts or customers considered to be a high risk of default.
• ·?????? Documentation and Record Keeping: ?The credit department will maintain meticulous records of credit applications, approvals, credit reports, and correspondence. These records will support the export-related credit decision-making.
• ·?????? Dispute Resolution Process: A defined contractual agreement for handling disputes with foreign customers must be in place as a precondition for any open-account sales to any foreign customer. The credit department, in collaboration with sales and legal teams, will work towards resolving disputes promptly while preserving customer goodwill.
• ·?????? Monitoring Economic Conditions: ?Recognizing the added component of sovereign or country risk in international sales, the credit department shall vigilantly monitor changes in the economic and geopolitical landscape of countries in which our foreign customers are located or headquartered.

This is the framework for a policy for managing credit risk in international transactions, ensuring prudent practices while facilitating growth in the international sales.

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