Domestic trade in the United States has been redefined by an unprecedented series of events, including terrorist attacks, natural disasters and corporate malfeasance—the most notable among them: the Sept. 11 attacks; hurricanes Katrina, Rita and Wilma; and the Enron scandal. These crises forced businesses to sharpen their focus on risk management and catastrophe contingency plans.

Internationally, trade has played an important role in the economic, social and political development of countries throughout history; indeed it has been the impetus of worldwide economic expansion and growth.

The risks associated with international trade are growing, particularly in developing countries. Among them are war, riots and civil upheavals; cancellation or nonrenewal of export or import licenses; expropriation or confiscation of the importer's company; and finally, the surrendering of political sovereignty.

Yet, in this tumultuous domestic and international landscape there is a risk more prevalent and transparent than natural or man-made disaster, political catastrophe or corporate fraud. It is a risk facing organizations in the U.S. and abroad, and it affects business on a daily basis: bad debt and late payment.

Business as usual

Extending and accepting credit is part of doing business. Debtors represent the largest single current asset on a company's balance sheet, and terms of fully secured payments or cash in advance are difficult to obtain. Bad debt and late payment create a wide range of problems for all types of businesses. For example large, global corporations have major concerns regarding debtor/obligor concentrations and country concentrations for receivables.

The credit risks inherent in domestic and international trade include:

• insolvency of the buyer
• protracted default, or the failure of the buyer to pay the amount due within six months after the due date
• nonacceptance

However, while trade credit risk cannot be eliminated, it can be effectively managed through credit insurance. Once something that favored only corporations with heavy international trade, particularly in developing nations, credit insurance is now used more frequently for domestic business. Many sellers of products on a short-term basis, such as consumer electronic manufacturers, now purchase insurance for these risks. In an era of heightened risk, no company can afford to ignore or become complacent about the growing risks associated with the provision of credit.

Risks in domestic and export credit

A company takes credit from its suppliers and gives credit to its customers. In a world where debtors and creditors form two sides of the same coin, an organization's cash flow is dependent on debts being paid.

Domestically in the United States, and increasingly in Europe, late payment of invoices is rising, affecting businesses across size, location and industry. For a majority of U.S. companies, normal credit terms are monthly, with payment due at the end of the month following an invoice, an average period of 45 days. However, delays in payment can sometimes reach 90 days. For some industrial sectors, such as food and other perishable goods, the credit period is shorter, profit margins are narrower and impact of late payment is more critical.

Internationally, export risk is growing, with average delays in payment exceeding 75 days from the date the invoice is received. Examples of bankruptcy and commercial default are significant around the world, yet U.S. organizations often assume that risk of nonpayment stems more frequently from political exposures than from pure default on the part of the buyer. This misperception must be clarified.

The United States has become a trading nation. Businesses are increasing their exports up to 25 percent, which is why it is critical for U.S. businesses to understand and manage export credit risks. The overall tendency is to pass the delay in payment from customer to supplier, but as the amount of time increases, the exposures increase as well, as there is a strong link between late payment and nonpayment (i.e., bad debt).