ARE INTERNATIONAL RECEIVABLES REALLY AS RISKY AS YOU THINK?

As globalization and the interdependence of world economies continue to increase, companies and lenders will need to rely more and more on risk mitigation tools to facilitate international trade. While credit insurance may be new compared to other risk-mitigation methods, it's becoming increasingly popular due to the advances in technology that have allowed for computerized -- and centralized - policy management.

What's behind the risky reputation of lending internationally? The list is formidable. For starters, financing internationally can entangle a lender in a complex web of laws and regulations that vary from country to country, costing the lender considerable time and money to document properly. Some regions come pre-loaded with political problems. There is also the exposure to foreign currencies and their inevitable fluctuations.

Perhaps even riskier is the reputation of extending credit, exacerbated by the belief that the risk of nonpayment increases along with the distance between buyer and seller. In the U.S. there are a host of agencies and organizations designed to facilitate due diligence and provide lenders with a level of comfort. However, these agencies are not as readily available outside the U.S., making the due-diligence process more complex and potentially more expensive.

Over the years, companies offering extended credit to their customers have employed a variety of tools to mitigate their risk. These include:

Deferred Letters of Credit: Letter of Credit is one of the most established and popular forms of payment, due to the fact that payments are guaranteed by a bank. However, some companies shy away from this method due to the costs associated with issuing the letters and the substantial discount the company is required to offer in order to get immediate funding.

Collection Factoring: A favorite method of risk-mitigation for small and mid-sized companies looking to expand, factoring protects companies against non-payment and risks associated with accounts receivable. Companies with creditworthy clients are in an excellent position to leverage this type of financing.

Working capital guarantees: This solution employs the assistance of the EXIM Bank and other government agencies to fill in gaps in the trade finance markets and act as an intermediary for brokers, lenders and exporters. It succeeds by offering workingcapital guarantees to reduce the risk for banks making loans to exporters. However, the uncertainty surrounding the EXIM Bank's charter renewal is causing companies and lenders to look for other alternatives.

Credit default swaps: Designed to transfer risk from one party to another, credit swaps are considered "insurance" against nonpayments, but are generally only available to publicly traded companies.

While these traditional risk-mitigation tools have generally worked well for larger businesses, they often are not practical for SMEs. For example, letters of credit have customarily been issued to large companies, while default swaps are costly. This has created a need for a new method of protection for companies, especially in the SME space, along with a new way to obtain liquidity against international receivables.

The Rise of Credit Insurance

Credit insurance is a fairly new risk mitigation tool in the U.S. compared to Europe, where it is widely used. However, with the continuing globalization of our economy, especially in the middle market, credit insurance has become increasingly popular with early adopters in the finance world. This is for a number of reasons. Credit insurance:

I is cost-effective;

I provides global coverage due to the way it is structured;

I enables coverage even against political and commercial risks.

I is readily available to businesses of all sizes, effectively guarding against customer default, insolvency and bankruptcy; and

I protects against practically all forms of losses stemming from bad debt, providing the kind of critical safety net needed to do business in the modern global marketplace.

Credit insurance allows for the safe issuance of open terms and increased credit limits to international customers or companies expanding abroad. In many cases it allows companies to extend length of credit, offering customers the option not to pay in advance and thus boost their cash flow - increasing customer satisfaction and ultimately sales. What's more, unlike letters of credit, credit insurance doesn't impose premium costs on customers, which can do wonders for customer relations.

So why are lenders wary of credit insurance and its benefits?

In the past, lenders shied away from using credit insurance because of a number of challenges associated with it, such as:

> manually tracking different policies from different carriers;

I dealing with the lack of standardization from carrier to carrier;

I consequences resulting from credit insurance policies being monitored improperly, such as coverage being dropped or decreased; and;

I concerns that compliance requirements are not been met, resulting in a failed claim and bad debt.

Today, however, technology is making such complications athingofthe past.

Risk Protection for the Digital Era

While credit insurance may be new compared to other risk-mitigation methods, it's already benefitting both companies offering extended terms as well as lenders worldwide. One of the key reasons for the adoption of credit insurance is the advances in technology which have greatly reduced the challenges that historically contributed to the unpredictability of credit insurance. These advances have allowed for computerized -- and centralized - management of the credit insurance policy or policies.

In the digital age, credit insurance can operate with the same degree of standardization - if not more - than its more mature risk-reduction-meth- od counterparts.

A number of credit-insurance management software programs are now readily available, including SI ideTrade, Tinubu Square and T.R.U.S.T.TM. These programs aggregate different sources of data from the carrier and borrower to allow them to "talk" to each other, reducing discrepancies between multiple policies and carriers. In short, they have standardized the monitoring of the policies, making credit insurance as viable an option as any other riskmitigation approach.

By automating and standardizing credit insurance administration, and by receiving real-time information directly from providers, this new technology has reduced the human error once associated with managing policies. This has also resulted in an improved compliance picture with vastly increased levels of transparency. The lender can be confident in the knowledge that customers are selling within the terms and limits of their policies. This means that claims can be met successfully.

Ultimately, this protects the lender from rejected claims and losses on a loan - and the carrier from having to handle unsubstantiated claims.

There are a number of other benefits to lenders and companies which are derived from this technology; namely, the cost savings in terms of management time and human resources required to operate credit insurance policies which have previously been run manually; and improved working relationships between the lender and the company as a result of the transparent information.

Better Policy Management, Better Credit Decisions

Today, many companies are looking to operate internationally and this means that their lenders must focus on global transactions. Country-tocountry risk has to be faced head-on.

The good news is technology now allows companies and lenders to see a true risk landscape by grading top accounts and detailing the spread of risk across borders. Managers can now collect data country by country and in real-time, both optimizing management and coverage. Likewise, data can be shared with the entire staff, enabling them to make the best-informed credit decisions possible. This "big picture" approach has rapidly made credit insurance a more appealing option for all parties doing business internationally.

By centralizing credit-insurance management into a single easy-tomonitor platform, everyone in the business chain benefits. A company's customers can buy more under better credit terms. Sellers can gain access to more credit, as lenders gain confidence from a structured insurance system they can rely on. The benefits also spill over to the credit-insurance carrier, whose policies are now easier to manage, and to the broker who can service clients better.

Looking into the Future

So are international receivables as risky as commonly believed? The answer is an encouraging "no" - provided the business is equipped with the proper tools to mitigate the risk associated with it.

This is good news because, as globalization and the interdependence of world economies continue to increase, we will need to rely more and more on risk mitigation tools to facilitate international trade. The technology driving standardization and automation will help pave the way for the future, tsl

Tessa Bitner serves as vice president of business development at FGI, a global leader in commercial finance. In her current position she is responsible for overseeing deal flow across the Midwest region for all FGI business units through the cultivation of relationships with middle-market banks, lending firms, intermediaries, private equity sponsors and other industry professionals.

Prior to joining FGI, she worked at Talon Merchant Capital as business development manager. There, she was responsible for originating inventory disposition opportunities such as liquidations, as well as forming strategic relationships with major consumer product brands and companies to source obsolete inventory for the secondary market.

Bitner has served on the TMA Women's Committee, CFA Midwest Chapter Golf Committee, ACG Social Committee and frequently speaks at leading industry events, most recently at the CFA Entrepreneurial Finance + Factoring Roundtable.

Bitner is a graduate of University of Wisconsin. She was born in Chicago where she currently resides with her husband and one-year-old son.

Walid Souilem serves as director of software development at FGI, a global leader in commercial finance. In his current position he is responsible for overseeing all aspects of both internal and clientfacing software development.

He began his career working at Alpha Engineer, where he was responsible for monitoring software for CIT's information technology division. Prior to joining FGI in 2011, he worked as a software engineer at Main Soft Informatique.

Souilem was born and raised in Tunis, Tunisia, and holds a B.S. in computer science from the University of Tunis El Manar ISI (Institut Supérieur d'informatique).