Effects of Late or Non-payments/Tenets of Risk Assessment

Tenets of Risk Assessment

The tenet, or established fundamental belief, of risk assessment is that international credit managers must constantly attempt to gather as many facts as possible in order to make the best credit decision for their companies. Their challenge is to evaluate and quantify the risk factors associated with granting credit to a buyer. This task becomes more challenging when a buyer is from another country. In the previous lesson, five factors were presented to consider when assessing a credit report: credibility, cost, value, timeliness, and completeness. Although each influences the level of risk to some extent, credibility of the information is particularly important in a risk assessment. For example, how does an international credit manager differentiate between fact and opinion? Another challenge is the fact that many buyers, especially if they are private, will not or cannot provide the necessary tangible information to assist in the risk evaluation process.

Company credit policies do not normally address the specifics of making the “best” credit decision. The credit procedures established by an exporter should include risk parameters. Risk parameters typically focus on clearly stating who is responsible for credit decisions, including the payment terms as well as the transaction value each person is empowered to make in a decision as to payment terms of sale to a buyer.

The credit procedures might also include how much credit an individual or department can extend, the escalation or approval process to decline or increase customer credit lines, and specifics as to when and who determines if a customer credit decision may require collateral.

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