A trade receivable can be an “invoice”. Trade receivable denotes a charge being made for the provision of products, commodities as well as services. It is usually governed with the help of signed contract between the importer and his exporter – which on the contrary includes what the exporter is supposed to do in order for the importer to be obliged to pay. If the exporter, somehow, fails in performing any of his obligations, then the importer’s obligation might get reduced or can even become zero. This is performance risk.
In such circumstances, the importer can normally raise a credit note and as a result will pay less than the actual or face amount of the invoice. The amount being paid will be less than the expected amount of the invoice or receivable.
In global trade, performance risks and performance related issues are common. Sometimes it can be a minor matter which will amount to just a few per cent. It rarely happens when the performance risk that much significant that it could affect the whole shipment.
Performance risk can be mitigated by considering a number of techniques:
As an investor of trade receivables, you should aim to figure out a diversified portfolio of both the parties i.e. buyer and supplier. But apart from this, more importantly, you must analyse how large the individual shipments as well as individual invoices are relative to portfolio.
Typically, the minor “business as usual” related performance risks have to be dealt with by the reserve which the finance provider creates when he pays less amount than the face value amount of the invoice to the exporter upfront and with the help of the paperwork put in place with the importer. Hence, there can be little chance for these performance risks which may cause an issue for an investor.
The failed shipment is a very rare condition which generally leads the importer to drop the exporter. For this the contractual position becomes highly important. For such situation, there exists a long negotiations as well as recovery processes for the finance provider. Apart from this, selecting an experienced finance provider who usually works with reliable supply chains along with the involvement of professional counterparties can be the best way for avoiding such high impact but low probability event.