How to manage business risk in international trade

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The commercial risk is present in all transactions that are not paid in cash. However, it acquires a special relevance in international trade. In fact, the concept of commercial risk is associated with foreign trade operations.

But,commercial risk in export can be eliminated of goods or services? The truth is that there are management mechanisms. Next, we show you all the details.

What is business risk?

Commercial risk is defined as the probability that a loss will materialize as a result of a problem related to the buyer's contractual obligations. It mainly refers to the possibility of default, either due to insolvency or delinquency of the client.

Naturally, it can cause serious problems for the company. Moreover, a possible default entails a lack of liquidity and may cause a reduction in the company's operating capacity. Thus, the risk of collection has the capacity to also impact the income statement.

Therefore, it is essential to have a plan to manage business risk.

How does commercial risk affect foreign trade?

In international trade all risks increase. But the risk of non-payment can be significant and affect the proper functioning of the company.

In principle, it is common to grant financing to foreign clients, since it facilitates sales. Thus, business credit in foreign trade is an important tool from a marketing point of view, but it is also necessary from an operational perspective.

The very nature of the transactions means that cash payments are practically unfeasible (higher volumes to offset logistics costs, time it takes to receive and check the merchandise, etc.).

Definitely, in foreign trade, the amount of the operations is usually higher and the payment terms longer. But companies have less knowledge of the customer, their situation and their solvency. Therefore, credit risk is higher.

If the payment does not occur as expected, the claims process can be long and complex. Sometimes it is necessary to have the services of a specialist in the legal mechanisms of the buyer's country due to existing cultural and legal differences.

How to manage commercial risk in international trade?

In the first instance, commercial risk management comes from the company itself. The first step is to analyze economic stability to determine a maximum level of risk you can take. Subsequently, you must guide your policies to the conclusions obtained.

Among other issues, The company must consider aspects such as:

  • Maintain a proper diversification of customers and products.
  • Accurately determine the contractual conditions.
  • Analyze the solvency of the client and the maximum financing that can be granted.
  • Carefully choose the means of payment.
  • Negotiate and reduce, if possible, the payment terms.
  • Manage accounts receivable diligently.
  • Require additional guarantees that minimize commercial risk.
  • You can choose the contracting export credit insurance.

In any case, there are export financing tools that reduce commercial risk and help companies to obtain liquidity to continue with their activity.

These are financial instruments that are located halfway between international collection methods and financing. They have the advantage of being able to stop worrying about payment monitoring and customer account management.

Export forfaiting

He forfaiting It is one of the most used techniques to reduce non-payment problems in foreign trade operations. It is especially useful for medium and long term operations, when there is a high commercial risk and/or a high country risk.

It allows exporting companies to receive immediate payment for their sales through the discount without recourse and at a fixed rate of credit titles (promissory notes and bills of exchange) issued against the importer.

Commercial bills are sold to a specialized company (forfaiter or forfaiting company), which pays their nominal value in cash less commissions and expenses.

export factoring

He international factoring It is a mechanism similar to forfaiting, with the difference that commercial paper is not sold, but rather a transfer of short-term credits.

The exporter sells the invoices of his commercial activity to a specialized entity (factor or factoring services company), freeing himself from commercial risk and another series of responsibilities.

Do you need help to export your products?

Be the first to take advantage of the export financing, a financial tool that companies access in order to Obtain an advance collection of your debtors' invoices, before the established deadlines are met or to cover the production costs that these products have caused.

This type of financing is intended mainly for self-employed workers and companies that export products abroad, although there are modalities that cover the case of national businesses.

If you need Professional HelpAt Alter Finance, a leading company in financial advice for companies, we will help you discover all the advantages of this financing.

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