Question

Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales? What examples can you provide from financial periodicals or your own experience?

Answer 1

Its always riskier to deal with people if they are not in the same jurisdiction. International trade is also not exception to this. Generally, companies that exports or imports are susceptible to Credit risk, Fraud of the counter parties and Exchange risk (forex risk).

Banks plays a major role in smoothening the business transactions between the parties. For example, an exporter will ask the buyer to open an LC (Letter of Credit) issued by the bank in the buyer's jurisdiction. Buyer approaches the bank and asks to open an LC. Once it is opened, these documents will come to the bank present in the seller jurisdiction. Then the seller will send the goods and once recieved by the buyer, intimates to the banker. LC is like a bank guarantee that bank will pay if buyer unable to pay the money to the seller as per the credit terms.

Fraud is also can be avoided with LC because if all the goods are fine, then only buyer pays or else he will not pay for the damaged goods.

Forex risk can be mitigated by enetering into hedging. In most of the cases, banks does the hedging for the companies who have international transactions by taking some percentage as the commission.