The main problem faced by exporters is due to loss / damage of goods in shipment, rejection of goods by importers due to several reasons and differ of payments from importers against export of goods / services. Importer will receive goods against post shipment documents. The post shipment documents will be surrender to importer only on Documents against Payment (D/P) or Documents against Acceptance (D/A). If shipment against D/P then there is no chance of payment risk because the documents will be released to importer only after payment. In case of D/A the goods will be transferred to importer on credit basis. Hence in this scenario, the customer may default the payment. This chapter includes information about potential risks associated with trading business in international markets.
5.2 MAJOR AREAS OF RISKS FACED BY EXPORTER IN FOREIGN TRADE & PREREQUISITES TO PREVENT or REDUCE RISK LOSS
Following are the major risks faced by exporters performing the international trade.
Credit risk
Political risks
Exchange Rate risks
Non-payment risk
Commercial risks
5.2.1 Credit Risks
RECEIVABLES MANAGEMENT
FINDINGS
Now a days to retain export performance and to sustain from competitors providing credit period to payment is very essential to each exporter. Most of the customers in overseas prefer for more credit period in order to reduce the more investment in business. In general importers in overseas forcing the domestic exporters for open account or consignment mode of payment which provides more credit period in which payment is done after sales only. However this type of credit sales result in to high risk of payment default.
Most of the trading operations takes place in between trustworthy and reliable parties only. But some new importers may interested to import goods on short term credit basis, In this situation an exporter will not interested to loose that particular contract. Hence exporter can prefer to export goods against letter of credit which provides more security to his payment against export and provides credit period also to importer.
5.2.2
Political risk
The main reason for this risk is political instability at export destination. The importing country government may disrupt or prevent completion of export contracts leads to this risk. The main risk faced by exporter are defaults on payments, exchange transfer blockages, nationalization of foreign assets, confiscation of property, sudden changes in government policies or, in extreme instances, revolution and civil war.
Some factors to consider are:
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RECEIVABLES MANAGEMENT
FINDINGS
Trade embargos enforced by governments affects the flow of goods or services and could affect the delivery of goods and getting paid.
Political upheaval may occur due to natural disasters, civil disaster or revolution, economic factors etc.,
5.2.3 Legal risk
There can be differences between domestic country law and the law of the country we are exporting. An exporter should understand what are differences and how they could affect export performance. It is very important to note that legal processes may not be the same of two different countries specifically when entering into contractual agreements. Some example cases where legal issues can create problems for exporters such as the differences in contract law between trading partner countries. because of this the use of internationally recognized contracts may alleviate some of these problems:
The question of which laws apply in disputes. Patent registration and other intellectual property issues.
Product liability laws and any implied consumer warranties.
Access to courts and dispute resolution mechanisms. Some countries may not permit local litigation or place restrictions on the type of claims which can be made.
Taxation and revenue laws.
Negligence and misrepresentation laws.
5.2.4
Exchange rate risk
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FINDINGS
Exchange rate risk can occur because of drastic fluctuations in the currency.
5.2.5
Non-payment risk
The risk of not being paid for goods or services is very serious problem of exporters to perform day by day activities regardless of country we are exporting. Depending on the opted payment option the level of risk effect varies.
Before offering credit sale to overseas buyer the seller capable enough to answer these questions such as:
Does exporter’s cash flow capable enough to offer credit terms ?
Whether he is aware of his customer’s credit history ?
Exporter should capable enough to take decision how to deal with importer directly or via bank or else via some agent ?
Whether exporter should aware of legal terms and policies or not before undergoing into agreement ?
