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International trade risk


Risk determines the method of payment


The evaluation of risks in the international trade arena plays a major role in determining the method of payment to be used for settlement between buyer and seller. Risk in international trade can be classified under the headings of country and commercial risk.

 

Country risk


All risks in or caused by the buyer's country


This can be defined by all risks in the buyer's country, or caused by the buyer's country, which may affect payment by the buyer to the seller. Country risk comprises political, social and economic components, including

  • Exchange control regulations
  • Changes in government policies
  • Trade embargoes
  • Lack of foreign currency

Commercial risk


Causes of exposure to loss

Financial constraints

A buyer's inability to pay due to financial constraints



Incorrect quality / quantity of goods

A seller's inability to supply the correct quality and quantity of goods



Inability to honour

A bank's inability to honour its undertakings



Importer considerations


Aspects to consider by the buyer


  • Can the seller be trusted to supply the correct quantity and quality of goods?
  • Will the goods be delivered at the destination agreed upon?
  • Will the goods be delivered in time?
  • Will your cash flow permit you to pay the seller immediately or is the seller prepared to offer credit terms?
  • Should you deal directly with the seller or make use of an intermediary bank or agent?
  • How easy/difficult will it be to resolve potential disputes/problems?

Please note

It is critical for both buyer and seller to check the creditworthiness and reputability of any new counterparty by obtaining bank reports and requesting trade references.

 

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International trade risk

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