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Do your homework! The five “C’s” of Credit
April 28, 2016 Office of Small Business

Whether your business is just starting to export or is an established exporter looking to expand into a new market, the more due diligence you can do on your foreign partners and buyers, the less risk you take on. The extent to which you’re able to demonstrate how well you know your customer and the market in which they operate in, the safer your firm will be from foreign risks.

For a lot of people and firms, this should be obvious. Of course, you would research your foreign partners and buyers before entering into a contractual obligation. However, based on our experience, there are many firms that don’t do enough research to minimize their own risks, let alone make an insurer or lender comfortable issuing a trade credit insurance policy or working capital loan guarantee.

The Five “C’s” of Credit

Although there is a never ending list of considerations when researching a new customer, many firms use the five “C’s” as a basic framework for evaluating new customers. Look at these as a starting point for issues you and firm should consider:

  1. Character

    What actions can you take to determine the customer’s trustworthiness and willingness to pay obligations? The idea here is to identify a customer’s willingness to pay obligations. Anything that demonstrates morality, integrity and trustworthiness is useful. To do so, you can ask for documentation on past successful transactions, a documented payment record, as well as employment history and credit history. Additionally, identifying and contacting suppliers and buyers who can act as a reference can show a lot about a potential customer’s character. Character is considered by many as the most important “C”.

  2. Capacity to Pay

    What actions can you take to determine a business’ ability to operate successfully and pay when a debt is due? The goal here is to find evidence that a foreign partner has the ability to pay. This can be done by gaining access to financial documents that show a firm’s ability to generate cash flows or provides evidence of prior business experience, such as good operations and bill payment.

  3. Capital

    What actions can you take to determine a business equity or net worth? Although not applicable to all transaction types and circumstances, gaining an understanding of a new partners net worth can go a long way in showing their ability to pay. This can be seen through documents that show a favorable trend of operations, increasing sales and profit, and/or the amount principles have invested.

  4. Conditions

    What actions can you take to determine how current and expected economic situations may affect a customer’s business? All businesses are affected by changes in national and international economy as well as industry cycles. When beginning to operate in a new environment, it is important to assess the country level conditions that could affect your customer or the transaction. This includes—at minimum—being familiar with the political and economic events occurring in the region, especially those that could pose a threat to your customer or transaction.

  5. Collateral

    What actions can you take to access a customer’s access to additional resources? Understanding a customer’s access to additional collateral shows more than just their willingness to pay; it shows their ability to pull themselves out of a position where they are unable to pay. Therefore, an assessment of assets that a firm has available can go a long way towards determining their riskiness.

Obviously, these five “C’s” are far from a comprehensive list, and should be seen as only a starting point. But don’t worry; there are resources out there to help you make the decision as to whether you can trust a foreign buyer. The Department of Commerce manages over 100 US Export Assistance Centers whose sole job is to help US businesses increase sales overseas. They have the resources and expertise to make sure you get what you need to be successful internationally. In particular they can provide international company profiles to analyze the financial health of potential partners. Click here to find the office closest to your location.

EXIM bank's trade credit insurance policy can help you determine the riskiness of a foreign buyer. For a novice exporter who does not have a credit department this policy provides complete underwriting services on your foreign buyers including the purchasing of the credit information we need to pre-approve your customer. There is no fee to apply for the insurance policy, and when you do apply you can submit up to 5 buyers for pre-approval. Click here to register for a free consultation with one of regional directors located all over the U.S.

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