Understanding the dynamics and complexities of international trade is important for buyers, sellers and lenders. Managing risks is key to growing a successful trading business, either internationally or domestically. This can be done by using specific types and structures of trade finance products. International trade carries substantially more risks than domestic transactions, due to differences in language, culture, politics, legislation and currency.
International Trade has particular characteristics that result in different types of risks. Trade financiers thus spend most of their time understanding and mitigating these risks. The following is a selection of some of the key risks in international trade finance:
A collection of risks associated with doing business with counter parties based in a foreign country, including exchange rate risk, political risk and ultimately, sovereign risk. Factors to bear in mind when considering country risks involve the current political climate in the country, the state of the local economy, the existence of reliable legal structures and the availability of hard currency liquidity, among other factors.
These are risks associated with the exporting/importing entities, primarily focusing on their credit rating and any history of defaults, either through non-payment or through non- delivery/deficient delivery.
This refers to potential losses arising from weaknesses stemming from, or defects in, the underlying trade (quality/adequacy of the goods being traded, robustness/adequacy of the contracts, pricing matters, etc).
To mitigate risks for both buyer and seller, the terms of payment may be part-payments and separate guarantees throughout the design, production and delivery of the product."
These are risks typically associated with either unknowingly engaging with a fraudulent counter party, receiving forged documents and insurance scams.
Documents play a vital role in international trade. Missing or incorrectly prepared documents pose risk for both buyers and sellers as this can cause delays in shipments and ultimately delays in payments.
Foreign Exchange/Currency Risk
This is the risk posed by fluctuations in the exchange rates, relating to payments and receipts in foreign currency. Unless it is hedged, the exporter or importer has no control over this movement in the rate of exchange and on occasion such changes can wipe out the profit or even more attributed to the transaction.
About 80% of the world’s major transportation of goods is carried out by sea, which gives rise to a number of risk factors associated with transportation of goods. Storms, collisions, theft, leakage, spoilage, cargo theft, scuttling, piracy, fire and robbery are just some of those risks.
Working with WeFundTrade can help reduce risk."