Anders Grath - The Handbook of International Trade and Finance (Summary): The Complete Guide to Risk Management, International Payments and Currency Management, Bonds and Guarantees, Credit Insurance and Trade

Buying and selling beyond your national borders add a layer of new risks to those of day-to-day domestic business. For all the technological advances that seemingly shrink the globe, transacting from a distance with an unknown customer or supplier still presents major headaches, and even potential losses. You must identify and plan for anything that could go wrong.

Sell more win market share enter new markets...the problem is often not making the sale but ensuring that you get paid.

This risk-identification process begins with your first business negotiation with a counter party. If youre the vendor, you want to get terms that maximize your profits while curtailing your risks. You might have to compromise if youre competing with others for a sale. As a buyer, you want to ensure that youre dealing with a reputable and reliable supplier who will deliver the products you want in a timely fashion.

Each area of international trade requires its own knowledge...from the first contacts between buyer and seller to final payment.

To provide common standards for trade in the cross-border market beyond the reach of national laws and regulations the International Chamber of Commerce (ICC) establishes the rules of global trade and investment. Its members include firms of all sizes in various industries and fields in more than 130 countries. As the worlds only truly global business organization and...the voice of international business, the ICC sets procedures and policies governing delivery, financing and payments, and establishes nomenclature for common trade terms that define delivery and payment conditions. It issues International Commercial Terms (Incoterms) that guide all parties in interpreting expressions found in trade contracts, such as delivered duty paid (DDP), cost, insurance and freight (CIF), and free on board (FOB). In addition to defining the terms of delivery and the terms of payment, any cross-border agreement should account for the commercial documentation and official requirements necessary to effect a smooth sale.

While different kinds of business dealings present different types of complexity, several distinct categories of risk can arise in an international trading transaction:

• Product, production and transport risks These risks concern the proper operation and performance of a product and its delivery, as well as its maintenance and warranties. Large projects or an ongoing series of transactions amplify these risks, as does the customization of an order for a particular client: If the buyer reneges, the seller may not find alternate buyers for the special order. The conveyance of goods should be clear from the contract; for instance, both buyer and seller must explicitly state at which point cargo insurance takes effect to avoid a scenario where, say, cargo gets damaged in transit but insurance coverage doesnt kick in until delivery.
• Commercial risks As a seller, you assume the risk of a client failing to execute the trade contract due to bankruptcy or other failings. Thus, you should obtain and analyze credit information about your buyers. A number of internationally recognized firms, such as Coface, D&B and Experian, provide exporters with commercial and financial data on importers.
• Adverse business risks Bribery, money laundering and facilitation payments present challenges to firms that may be unfamiliar with local practices or criminal activity in overseas markets. Companies should watch for suspicious transactions when dealing with new clients or with existing customers who alter their usual ways of doing business. Among the variety of giveaways that signal potentially shady practices, look for unusual payment settlements, secretiveness and complicated accounts structures.
• Political risks Unexpected governmental actions along the route of transport can present sellers with extraordinary risk. Revisions in taxes, import levies or currency movements can render a sales contract inoperable, as can new trade barriers, environmental clauses and product criteria. Reports on a countrys political, social and economic situation from third-party providers can give exporters advanced knowledge about the market theyre entering.
• Currency risks When an exporting company sells in a foreign currency, it faces a currency exchange risk. Fluctuations in the value of the buyers currency relative to the sellers could endanger the transactions profitability. With globalization, much of the worlds trade now takes place using the US dollar and the euro, as well as other strong currencies, such as the Japanese yen and the Swiss franc.
• Financial risks Every aspect of a business transaction involves financing risks, which increase in line with the prolonged commercial and/or political risk. Trade parties should clearly express the terms of payment and time frames in their sales contracts so they dont incur liquidity problems or capital losses.

The end goal for any exporter is swift and safe payment. Ideally, notwithstanding competitive pressures, a seller generally prefers payment in order of security first, by cash in advance before delivery; second, through a documentary letter of credit; third, via a documentary collection; fourth, by a bank transfer (based on open account trading terms); and fifth, through other payment or settlement procedures, such as barter or countertrade. In reality, four methods of payment are most common, based on a transactions characteristics: