How can importers and exporters effectively manage trade credit risks
Before we start, let’s read some real cases during this outbreak:
- After the outbreak, Jordan banned the import of Chinese animal and plant products. As a result, an agricultural product of an export company could not clear the products at custom to Hong Kong on February 10, and the buyer refused to pay the purchase price.
- An export company signed a clothing export contract worth 150,000 US dollars with a customer in India and agreed to ship in two batches before January 6, 2020, and February 6, respectively. Payment method: Full payment within 30 days after the bill of lading date. A batch of 100,000 US dollars of goods has been loaded on January 6. Due to the epidemic situation, the second batch of goods has not been shipped on time according to the contract. The first payment of 100,000 US dollars has expired on February 6, and foreign customers have refused to pay. The reason for that is the exporter can’t deliver the goods on time according to the contract.
These two cases fully reflect the internal and external problems faced by a vast number of export companies in the recent period. Internal concerns mainly refer to the epidemic situation that has severely affected the production and stocking of export enterprises, and failure to perform according to the contract has led to foreign trade risks. The second case is a good example.
So how should importers and exporter prepare for the trade credits risks? Here are some helpful tips:
- Pay attention to laws and regulations, pay close attention to the development of the epidemic situation in the destination countries or regions, and minimize the trade with the countries or regions with the epidemic situation in the short term;
- Reevaluate all orders. Either you export to or purchase orders from areas with severe epidemics, such as South Korea, Italy, Japan, USA, etc., you should enhance communication with customers on the impact of the epidemic on contract performance and comprehensively evaluate risks such as customs clearance and logistics risks. Then decide whether to execute as planned initially;
- Make a quick decision. For the import and export business of other countries and regions that have not yet reached a large scale, you better make a quick decision to speed up the signing and implementation of the contract as much as possible.
- Trade Credit Insurance. In special periods, it is recommended that you choose a safer settlement method as much as possible. If you adopt a higher-risk settlement method such as DP or OA, trade credit insurance is a great way to reduce the risk of foreign exchange collection. In terms of imports, for example, epidemic prevention and control materials are very sought-after in the international market. Import companies often need to pay a high proportion of prepayments. Trade credit insurance can ensure the safety of prepayments.
- Optimize inventory. Production-oriented enterprises should formulate emergency plans regarding raw materials storage and export schedule. It can help to avoid a shortage of raw materials or backlog of raw materials or delay due to epidemics.