16.5 Mitigating Trade Finance Risk

Trade finance risk is mostly connected to non-payment and non-performance, i.e., commercial risk. Exporters and importers always are concerned about commercial risk and try to mitigate it in early stages of their trade transaction. The users of trade finance should always act proactively and find ways to mitigate commercial risk while signing their sales contract. This can be done only if both parties are aware of the risks and the ways to mitigate them. Let us look at some mitigation strategies.

• International trade finance instruments: Trade finance instruments have evolved significantly over the past few decades. The growth of trade has changed the risks organizations face these days and ways that they use to mitigate such risks. There are four instruments that are commonly used: open account, advance payment, documentary collection, and documentary letters of credit (FITT, 2023). Each of these methods has its own characteristics. Thus, selection of these methods of payment broadly depends upon the kinds of risks importers and exporters are facing. Chapter 20 discusses these methods of payments in detail.
• International financial institutions and aid agencies: These financial institutions and aid agencies can be banks, intermediaries or third parties providing financing to importers and exporters. With growth of trade financing needs, there has been growth in such institutions and the variety of services offered by them. These could be public and private funded organizations, could be operating at domestic or global level. Chapter 21 provides numerous examples of these financial institutions and trade agencies.

In the real world of international trade, there could be some cases where managing or mitigating risk is difficult. In such cases, organizations end up in disputes. In international trade, disputes could be complex to handle but there are alternative dispute resolution mechanisms developed to help resolve disputes. There are many international organizations that have now started providing consulting services in such disputes.

References

FITT. (2023). FITTskills: International trade finance, (7.3 Ed.). Forum for International Trade Training.