For the seller who pays in advance or the buyer who pays the loan in advance, the credit constraints of trade transactions disappear completely after payment and delivery. Whether the trade can be successfully completed in the end mainly depends on whether the two sides of the trade have faith in their words. If they encounter bad trade If there is a problem in the whole trade process, all the financial losses will be borne by them.
Like collection and remittance, the entire trade process is mainly based on the credit agreement reached by both parties. The banking institution that settles the money does not bear any credit risk or economic risk. The biggest risk of this payment method is the exporter. Because there are many importers who cannot pay the payment in full at one time, or the importers delay the payment due to changes in the international economic market, it can be seen that the importers have absolute initiative in the trade.
The Risk of Letter of Credit:
The letter of credit is bound to the bank’s credit, which largely avoids the credit risk of remittance and collection. For the exporter, once the bank has issued the corresponding valid documents, it can smoothly solve the importer’s delay in payment or payment. Problems such as refusal to pay, but this method of payment still has certain risks.
For example, the exporter did not deliver the goods according to the agreed time, the financial documents did not meet the requirements, etc. Although the letter of credit is based on the credit of the bank, there are still many uncontrollable factors in the whole trade process. If the merchant repeatedly delays the delivery date, the letter of credit completely loses its value and significance.
The Risk of International Factoring
International factoring can reduce the trade risk of the exporter very well. As long as the goods provided by the exporter meet all the requirements of the trade contract, the entire trade can proceed smoothly. The factoring party will make all claims and undertakings, but since many exporters still face various risks such as credit sales and collection, the factoring party also faces certain risks. Once the importer goes out of business due to the wrong operation mode or ineffective capital turnover, the factor will take full responsibility.