Risk management in international trade
Hesitant to enter the international trade industry because of the risks involved? Then come check out our blog to learn more about the main types of risks in trade and how you can best prevent them.
Several types of risk may arise in international trade. While the Vienna Convention on the International Trade of Goods, of which the signatory countries represent approximately 75% of world international trade, is the main legal framework governing international sales contracts, it does not address all of the issues that arise in trade. The main risks associated with global trade are noncompliance with imported products, nonpayment risks, and exchange risks. Here are three different ways you can manage such risks:
Risk of Non-Compliance
The risk of non-compliance lies in receiving merchandise that is different from the one ordered and not realizing it until after delivery. To prevent this, when establishing a new business relationship, it is necessary to gather recommendations and reviews. You must also include a clause in the contract that allows for quick and easy compensation in the event of product non-compliance. Finally, opting for a documentary credit as a means of payment can also be an option to consider in certain cases as long as the bank will verify that the goods shipped comply with the order before making the payment. If the non-compliance is due to damage to the goods and is discovered upon arrival, the buyer can refuse delivery.
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Risk of Non-Payment
This is the risk that international sellers dread the most. To avoid this, sellers have several tools at their disposal. The easiest and most effective way is to get paid in advance, but it is rarely used in commercial transactions between regular partners. In most cases, the seller can include a retention of title clause in the sales contract to remain as the owner of the goods until full payment is made.
Sellers can also ask to be paid by documentary credit confirmed by a bank. This means once the seller has fulfilled all contractual obligations and provided the necessary documentation to the bank, the latter pays the seller the invoice amount on behalf of the customer. Lastly, sellers can also take out credit insurance from their bank or insurance company.
Currency Risk
In the case of foreign currency payments, the exchange rate of a currency may fluctuate between the date an invoice is issued and the date of payment, resulting in losses to either the seller or the buyer. As a solution, the two parties can agree on a fixed exchange rate that will be applied when the invoice is due. Moreover, buyers can also take out insurance from their banks to ensure that they receive the same amount regardless of exchange rate fluctuations.
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