What are the Risks Associated with International Trade Finance?

International trade finance is a risky business. It is significantly riskier compared to national trade finance activities. Here is a brief on the major risks associated with international trade finance.

Risk of Payment

The biggest risk in trade finance is the risk of payment. This risk is handled by the client who is delivering the goods. If this client does not receive a timely payment for the goods, he/she is in a complete loss. Most international deliveries are extremely time-sensitive and need a wholesome series of actions in perfect succession just like a pile of dominoes falling on each other. If one domino is out of position, the entire series suffers the consequence.

Risk of Receiving the Wrong Goods

International trade is usually carried out by large organizations that handle the shipping experience for millions of goods every month. Even a slight miscalculation or misprint might mess up the shipping process. The receiver might not receive the goods at all or might receive a completely different set/quantity of goods. This is why most trade finance transactions involve shipping guarantee contract that ensures delivery of right goods.

Political and Sovereign Risks

The global politics affect the international trade finance in major ways. If the national governments of the participating clients are at a disagreement, the trading might have to stop completely. In a worst-case scenario, the shipped goods end up in the middle of the sea where none of the countries is ready to accept them back.

Currency Exchange Risks

The currency exchange rates affect the invoice amounts by a huge margin. Even minor deviations in the exchange rates can affect the final invoice in the order of millions of dollars.

Corporate Risks

Corporate risks are always the part of the international trade finance game. It is a good idea to perform a background check for the participating companies so that they can carry out the trade without any hidden agendas. 

The international trade finance companies usually have a complete set of rules and regulations in place to prevent financial and ethical damages in the business operations.