Dun & Bradstreet’s Country Insight team advises customers on minimum and recommended payment methods, ranging from open account to cash in advance, for 132 countries around the world.
Of the several grades of risk management or trade terms available to shippers, Dun & Bradstreet advised open account terms (where the seller takes all risk) as optimal for 30 countries as of November 2015.
For higher-risk countries, the minimum guidance stood at “sight draft” (also known as documentary collection, or cash against documents) in 26 countries. A letter of credit is advised in 37 countries, while a “confirmed” letter of credit is recommended in 31, and cash in advance for eight.
The five grades are simplifications of commercial practice: There are several varieties of documentary collection (cash against documents, where the importer gets the documents of title to goods in exchange for giving cash to a local bank).
Various forms of letter of credit (in which a bank guarantees the importer’s payment) also exist. Then there are the other trade finance flavors and instruments, such as credit insurance, and factoring, where a bank, or nonbank, buys the accounts receivable from the exporter for a discount.
Countries where Dun & Bradstreet advises open account terms are an unexciting list dominated by low-growth Organisation for Economic Co-operation and Development (OECD) markets. Hong Kong, Taiwan, and Singapore are on the list. More surprisingly, the list includes five Gulf kingdoms: Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
These 30 countries have an average annual GDP per capita of over $48,000. Those markets where D&B advises cash in advance, with the buyer or importer taking all the risks, include the usual list of countries under sanctions or subject to deep, chronic political dysfunction. These countries are Afghanistan, Cuba, Iran, Libya, Sudan, Syria, Yemen, and Zimbabwe. They have a median GDP per capita of just over $1,600.
Most new opportunities driven by broad economic growth trends such as rising middle classes will, over the rest of the decade, lie in countries between these extremes.
Broadly, the markets where GDP per capita ranges from $3,250, the median for those countries where Dun & Bradstreet advises a letter of credit “confirmed” by a bank in the exporter’s country, up to $15,000, the median for the countries where a minimum of cash against documents is recommended.
Choosing the right risk-sharing, trade finance mechanisms to trade with in these markets is where companies can demonstrate commercial acumen that will likely lead to growing market share and enable executives to maximize and defend the value of accounts receivable.
Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow/United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics.