Proven Ways To Reduce Payment Risk In Foreign Trade
Being an international businessman, you cannot deny the possibility of finding yourself at the higher-level of risks while initiating a transaction with an unfamiliar importer or exporter in the overseas market compared to domestic markets. Different laws, customs, ethics, transportations, credit, currency, and many more, trading in international business is always synonymous with handling these overseas risks.
Whether you are doing business in the United States, Asia, or anywhere else, these associated overseas risks can disrupt the effective running of the business, and therefore, necessary measures are required to be taken. There is no denying that foreign trading comes with several possible risks but being aware of these risks and taking quality steps to minimize them can help you ensure the long-term success of your organization.
Here are some of the main risks commonly faced by any global business involved in international trading and the most-sorted ways to deal with them:
1. Credit Risk -
Credit risk or counterparty risks in international trade finance is a risk of not collecting account receivables. In simple words, it is a risk where a counterparty to a transaction defaults to perform as per the terms and conditions of the contract and the concerning party does not receive payment for the exchanged goods & services. There are many ways businesses operating in international markets can protect themselves against credit risks.
- a. Letter of Credit - This refers to a legal document issued by a bank or a financial institution wherein the issuing bank agrees to pay a certain amount to the exporters in the event if the importer defaults or incapable of performing terms and conditions of the contract within the prescribed time. It means the issuing bank acts as a guarantor on the behalf of the importer and assures exporters that the payment will be made upon the presentation of evidential documents. Letter of Credit or Bank credit letter or documentary credit is one of the most secure financial instruments available to global traders.
- b. Cash in Advance - The flexible payment terms of cash-in-advance allows exporters to get the payment even before the ownership of the goods is transferred. This way, the exporters can avoid credit risks as the payment is received in advance. In international transactions, wire transfers and credit cards are the commonly used cash-in-advance instruments for the exporters.
- c. Documentary Collections - A documentary collection is a transaction where the exporters are entitled to receive the payment upon the presentation of shipment documents. In other words, it is a process where the exporter instructs his bank to forward the shipment related documents to the importer’s bank with a request to present them to the importer for payment. Exporters get the payment from importers through the banks involved in the transaction.
2. Foreign Exchange Risk -
This type of international trade risk deals with the accounts payable and receivable for the transactions that are going to be in force. Since foreign rates fluctuate, the businesses are bound to convert their funds generated overseas at lower rates than was budgeted. Therefore, they are required to adopt a suitable exchange policy to:
- a. Sustain profit margins over sales
- b. Boost liquidity ie cash flow control
- c. Minimize the opposite effects of fluctuating rates on sales
3. Shipping Risks
At the time of shipping goods, no matter whether domestic or locally, being an international trader, there are a lot of shipping risks you face. For example, seizure, delay, accident, theft, loss and breakage, and many more.
To avoid all these shipping risks, the exporters need to make sure to have proper insurance before transferring goods to the buyer. Also, the concerning parties are required to go through the rules and take the necessary steps.
4. Intellectual Property Risk -
This is the risk when the third parties make an uncertified use of business’s sensitive information consisting of the valuable products or services offered by a business directly or indirectly. For example, studies, research, or agreements, etc. The risks are even higher while initiating an overseas transaction but can be avoided if the concerned party gets the corporate name registered along with the trademarks before agreeing to any type of agreement with the party.
5. Country And Political Risks -
These types of risks include non-tariff trade barriers, changes in the party in power, wars between the countries, exchange regulations or ban on selling of particular products in specific countries, etc. Although there are a few things that are beyond the control of a global trader such as Sanctions, these political risks can be avoided by selecting the countries judiciously.
Emerio Banque can help you operate your business successfully in the international market by reducing these foreign trade issues with a range of import/export trade finance services. From LCs to corporate payment cards, and lending solutions to investment services, the financial instruments are safe and can be customized as per your business’s requirements.