What are the risks and challenges in trade and finance?
If we compare international trade from domestic trade, the result comes out as international trade more risky than the domestic trade. It is important for a trader to understand the culture, language, politics, legislation and currency of another country which indeed is a difficult task to do. Mitigating risk through the type and method of trade finance is crucial when ensuring successful trade. Below we have mentioned some types of risks that come under product, manufacturing, transport and currency risks.
PRODUCT RISKS
Product risks are the automated risks which have to be accepted by the sellers as an integral part of their commitment. For example, specified performance warranties, agreed maintenance of service obligations. Crucial external factors like how negligence is being performed during the process of production or how the extreme weather during the time of shipping can affect the product.
These are one of the prominent factors which lead to disputes between the parties, even after they sign the contract. It is important for both parties to make sure that the contract has been made adequately in such a way that if it affects the product, by default will include compensation or changes in the seller’s commitments.
MANUFACTURING RISKS
Product that has been made with different specifications carries manufacturing risks and is a very common risk in this industry. The cost of readjustment is covered by the seller before hand or until the buyer sees fit, because they then cannot sell the products to the other buyers. These risks are easily noticed during the period of product planning, meaning the buyer will have to pay the seller at a very early stage of transaction.
In order to limit the risks for both the buyer and seller, they make the process of payment into part- payments and separate guarantee.
TRANSPORT RISKS
Transport risk also plays a vital role in export import market and business. Cargo and transport risk can only be reduced with the help of cargo insurance, which we define as standard international policy wordings (the definition issued by the institute of London underwriters or the American Institute of Marine underwriters).
A seller should be aware and known of the area from where the cargo insurance papers are made and who has taken the person in charge of all the arrangement of the papers related to cargo insurance. Another place where the risk might take place is the buyer arranging the insurance according to his convenience and terms of delivery. In case the buyer is not able to give the surety of the cargo shipment in a proper way, the insurance can be considered as invalid.
CURRENCY RISKS
Currency risks most often occurs due to the foreign exchange rate as it keeps on fluctuating. That is why the management who handles the exchange rate has to become strong and active. They are pressured to reduce the exchange rate because the government keeps examination of everything on a regular basis.
Currency risk policies does not have a great effect on anything has been relatively very basic if we compare it with history and time.
What is a trade receivable?
This is a trade type where the exporter first ships the product and then the buyer pays him the amount. This is what we call as “ship now, pay later” trade. This trade usually involves the creation of trade receivables. Here the buyer is obligated to wait until the shipment is done. This is what we call ‘a trade receivable’. One thing that we need to keep in mind is that these trade receivables are usually short dated, with a particular credit period of 30, 60, 90 and 120 days.
Why is there interest in trade receivables?
Trade receivables nowadays are given a lot of attention.
- Most of the banks have now decreased the amount of trade finance that they provide for regulatory, compliance and political reasons.
- Fintechs are the one who are targeting this market now. This alternative asset class is now quite famous and is promoted to all the investors out there.
- Many players in the trade environment are looking to add finance to their core activity (freight, shipping, marketplaces, technology platforms).
How big are the risks?
The types of risks mentioned above can only be measured through the way trade receivables are being generated and what parties are involved in the work.
For example:
Buyer credit: weak or strong?
- One thing that becomes very obvious that all the buyers who have kept large and prime quality credits are but obvious going to have a well-established supply chain and all the professionalism in them especially when it comes to sourcing and making payments continuously without interacting with any issue. In other words, they become the strong buyer credit.
- Weaker buyers usually do the work of taking shortcuts and then they easily supply the products to their suppliers and thus have less experience with the supply chains as well and this leads to them getting into strong price pressure.
Confidential versus disclosed?
- The buyer should make a confirmation from the supplier regarding the trade receivable, otherwise double jeopardy will be applied as there comes credit risk building up for both buyers and suppliers.
- Confidential trades also bring up significantly higher fraud risk. If the buyer does not confirm the order, then the supplier will supply the goods at his own risk.
- If the buyer does not send an assignment notice, the buyer has the authority to legally reduce his payment if the supplier owes him money somewhere, this process is known as set off.
Frequency of shipment / history of the supply chain
- Supply chains that are not frequent with their shipments tend to have higher performance risks.
- Supply chains with very less history, or who are doing shipments for the very first time tend to have higher performance and fraud risks.
How does Connect2india manage risks?
Connect2india has a diversified portfolio of trade receivables that is supported by structures and procedures in order to limit these risks. We generate securities that investors can believe upon and are able to build up trust.
