TOP 3 export trade myths – do not get stuck in your old ways
SMEs are too stuck in old operating models in their export activities. Payment methods that enterprises find safe diminish SMEs’ courage to expand trading to foreign countries or to seek new clients. The main problems are the use of certain payment methods, poor awareness of receivables protection, long fund repatriation periods and even naivety. Below you can find three typical myths associated with export trade as well as solutions for them.
Myth 1: Our enterprise does not face a risk of credit losses
Many SMEs practise credit trade, that is, goods are transferred to the buyer before they are paid in full. Such transactions always entail a risk of credit losses. Regrettably often Finnish enterprises think that when dealing with old and familiar clients, there is no or only a very small risk of credit losses. After all, the clients have always paid their invoices. According to my study, insufficient attention is paid especially to the monitoring and supervision of Finnish clients, although every year the enterprises’ largest credit losses occur with these familiar clients. Credit insurance is an excellent way of protecting not only export trade receivables but also domestic receivables.
Myth 2: Advance payment is the one and only payment method for new clients
It is true that advance payment is certainly the safest payment method but caution may also be a deterrent to growing the enterprise’s export trade. When only advance payments are used, deal sizes remain fairly small and, in some cases, enterprises may also fail to close deals. Credit insurance protects the enterprise from credit losses, secures the enterprise’s cash flow and boosts sales. In addition to protecting sales receivables, credit insurance is also a means of obtaining information about foreign clients.
Myth 3: The enterprise is too small for creating a credit and risk policy
No enterprise is too small for creating a written credit policy. The credit policy defines the principles and operating methods that enterprises adhere to when practising credit trade. The risk policy should include a framework determining, for instance, the kinds of risks the enterprise is prepared to take and the risks against which protection is applied. In practice, this may mean country or client limits and recommendations on payment methods to be used, for instance. When the enterprise’s credit and risk policy is familiar not only to the management but also to the sales personnel, the enterprise’s credit trade is better managed and its risks are lower. As a result, the entire organisation operates according to the same principles.
The writer is Finnvera's finance manager who wrote her diploma thesis on SME's export receivables protection and credit insurance to Lappeenranta University of Technology.
More information (in Finnish): www.finnvera.fi/pk-vienti.