Trade Finance/Commercial Risk
Module 3: Commercial Risk
The objective of this module is to research and analyze credit history and payment capacity of potential buyers/partners to assess the commercial risk of a buyer and maintain credit management and control procedures and documentation.
This resource on international finance is focused on the global business professional who is a generalist who may be involved in the sale of goods and/or services internationally. A global business professional needs to be able to research and analyze the credit history and payment capacity of potential buyers/partners in order to assess the commercial risks of buyers and maintain credit management and control procedures and documentation. This statement can seem overwhelming to those who are new to international finance [business]. We will break it down into pieces and discuss each piece.
The section on researching and analyzing payment capacity of potential buyers considers the most frequently used tool to perform such an analysis, the credit report.
The second part considers the aspects of risk. Assessing the commercial risks of a buyer is assessing a credit history. If you have a credit card or a loan, you as an individual have a credit history. This credit history was created by how well you paid your credit card bills or your car loan payment or your mortgage each month. With the onset of the Internet, you may have seen commercials for yourcreditreport.com or commercials that show a couple who want to buy a house and learn that their credit report does not show favorable repayment histories, so they can’t buy their dream home. Now, consider a business that wants credit in order to obtain goods without having to pay in advance. The concept is similar, but the process and the data used to assess a business to see if it has a track record of repaying business obligations is a little different.
The last part about maintaining credit management and control procedures and documentation involves the number of credit transactions a business might need to process as well as the process for managing credit decisions. These processes should be documented because extending business-to-business credit (selling on open account) can be quite complex, depending on the amount of credit, how long the buyer wants the credit for, whether a buyer and a seller are located in the same country, and what information is available.
Some may argue that the topic of credit reports alone can be a small course in itself. In this module, the focus is on the following topics:
- the purpose of the credit report and what the data means to both a seller and a buyer.
- the sources of credit reports. When it comes to commercial credit reports, it isn’t quite as simple as logging onto yourcreditreport.com. This module reviews several sources of credit that a seller or lender might use to research a credit history.
- credit information and risk assessment. Once you locate a credit report for a buyer, you need to interpret the information in context with the potential risk of a buyer faulting or not repaying.
- risks associated with methods of payment. A buyer wishing credit may have a great track record when it comes to short-term credit lines but not when it comes to long-term repayment. If a buyer needs long-term credit, the possibility of nonpayment increases since over longer periods of time the uncertainty regarding a buyer’s ongoing creditworthiness is greater. There are options for a seller and a buyer. Modules 7 and 8 provide more details on short, medium and long-term financing whereas this module will just provide an introduction to some types of payment and not necessarily terms.
- risk mitigation techniques. The methods of payment are actually one way to mitigate the risk that a seller may not be repaid by a buyer. However, there are some more commonly used techniques that will be introduced here.
- Unit 3.1: Sources of Credit Reports
- Unit 3.2: Costs and Value of Credit
- Unit 3.3: Effects of Late or Non-payments
- Unit 3.4: Payment Methods for International Transactions
- Unit 3.5: Mitigating Techniques for Commercial Risk
About this Resource
These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.