Trade finance plays a pivotal role in facilitating global commerce, enabling the seamless flow of goods and services across borders. However, even with trade finance in place, global trading is not without its challenges, and one of the most prominent risks that businesses must contend with is credit risk.

Understanding the nuances of credit risk in trade finance is crucial for merchants seeking to mitigate potential financial losses, supply chain disruptions, and strained relationships between merchants and buyers.

What is Credit Risk in Trade Finance

At its core, credit risk in trade finance refers to the possibility that a party involved in an international trade transaction may default on their payment obligations. This can be caused by many factors, from the financial instability of a buyer to the impact of broader economic, political, and regulatory factors.

Unpacking the key drivers of credit risk will help merchants develop effective risk management strategies.

Counterparty Risk

One of the primary contributors to credit risk is counterparty risk, which is the uncertainty surrounding the financial reliability and creditworthiness of buyers. If a buyer lacks a strong financial standing or a reputable track record, the likelihood of default increases, exposing the merchant to potential losses.

Economic Conditions

Fluctuations in the global economy can also significantly influence the ability of merchants and buyers to fulfil their financial commitments. Economic downturns can lead to reduced consumer demand, disrupting the cash flows of businesses and potentially triggering defaults on payments.

Political and Regulatory Factors

Political instability, changes in government policies, and regulatory hurdles can also contribute to credit risk in trade finance. Disruptions to trade flows and payment mechanisms can make it challenging for parties to honour their obligations, leading to non-payment scenarios.

Currency Fluctuations

Trade transactions often involve different currencies, and exchange rate fluctuations can impact the affordability of goods and services for buyers. This can potentially affect a buyer's capacity to make timely payments, increasing the credit risk for the merchant.
‍

How Trade Finance Mitigates These Risks

Trade finance products cover a broad range of types of solutions which are designed to reduce the credit risks listed above. Trade financing gives exporters receivables or payment when agreed upon, while importers may receive credit to fulfil trade orders. This essentially removes the payment and supply risks by involving a third party. 

These solutions include:

• Letter of Credit (LCs)
• Trade Credit insurance
• Invoice Factoring or Forfaiting
• Invoice Discounting
• Prepayment Finance
• Pre-Export Finance

A Better Alternative to Trade Finance

Developments in PayLater solutions have provided merchants with a way to solve for credit risk problems in global payments at the source. Rather bearing the risk after the transactions are made, merchants can offer credit terms while being paid upfront. 

With Kriya PayLater, merchants can mitigates global trade credit risks to a minimum, while providing an exceptional buyer experience:

• Get Paid Upfront - Merchants are paid upfront, while buyers select payment termsthat suit them.
• Offline & Online Sales Channels -  Merchants are able to offer flexible payment terms & a spending limit for international B2B buyers that can be used across all your sales channels, from your website, to telesale & wholesale.
• Protect your margins - Cut out the distributors and sell directly to your buyers in international markets. PayLater provides a scalable way for your buyers to self-serve on payment terms while Kriya shields you from the credit risk.
• Available in 45 countries - Merchants can offer PayLater to buyers in 45 countries across Europe, North America, India, Middle East, Asia, Australia & New Zealand. We support a range of currencies including; GBP, USD, EUR, AUD, CHF.
• Avoid Credit Risk - Kriya provides instant & seamless credit checks & authentication at the point of purchase protecting merchants from credit and fraud risk.
• Single payment flow - PayLater is an easy, seamless payment flow with buyer authentication, credit limit setting & automated payment collection.
• Strong backing - We’re backed by Barclays, Santander, Northzone & British Business Bank, giving merchants the reliability they need to trade with confidence.

Consequences of Credit Risk in Global Trade

When credit risk materialises in the realm of trade finance, the consequences can be far-reaching, affecting not only the immediate parties involved but also the broader trade ecosystem.

Financial Loss

The most direct impact of credit risk is financial loss. If a seller does not receive payment for the goods they have shipped, they may face cash flow challenges and struggle to cover their own expenses, potentially leading to broader financial difficulties.

Disruption of the Supply Chain

A default or non-payment can disrupt the supply chain, causing delays in production or delivery. This can have a ripple effect, affecting a buyer's ability to fulfil their commitments to their own customers, further exacerbating the consequences of credit risk.

Strained Relationships

Non-payment can severely strain the relationships between merchants and buyers, eroding the trust that is essential for ongoing trade.

Higher Costs

To mitigate credit risk, merchants may need to invest in credit insurance, credit checks, or other risk management tools. These measures come with associated costs that can ultimately eat into profit margins, reducing the overall financial viability of trade transactions.

Limited Market Access

Persistent credit risk issues can lead to limited market access for businesses. Merchants may be reluctant to engage in global trade due to concerns about non-payment, effectively restricting the growth and expansion opportunities.

Navigating Credit Risk: Strategies and Tools

To effectively manage credit risk in trade finance, businesses can employ a range of strategies and tools to safeguard their interests and minimise the potential for financial losses.

Credit Checks

Conducting thorough credit checks on potential buyers is a fundamental step in mitigating credit risk. This involves assessing the financial health, payment history, and overall reputation of the buyer, providing valuable insights into their creditworthiness.

Credit Insurance

Obtaining credit insurance can serve as a protective mechanism against non-payment. Credit insurance providers can compensate the insured party in the event of a default, helping to cushion the financial impact and ensuring the continuity of trade operations.

Advance Payment

Requesting upfront payment or partial payment before shipping goods can reduce the risk of non-payment. However, this approach can also affect the competitiveness of the transaction, as it may be less attractive to buyers.

Letters of Credit

The use of letters of credit, a financial instrument provided by banks, can help ensure payment upon the delivery of goods. The bank acts as an intermediary, guaranteeing payment to the seller, thereby mitigating credit risk.

Trade Finance Facilities

Leveraging trade finance facilities, such as factoring and forfaiting, can provide an additional layer of protection. These solutions involve selling invoices or receivables to financial institutions, securing immediate cash flow and reducing the exposure to credit risk.

PayLater 

PayLater solutions provide merchants to offer credit terms while covering themselves from a risk perspective. With Kriya, the credit checking process and authorisation is done seamlessly at the point of purchase. Buyers are assigned credit limits & payment term options, while the merchant receives full payment upfront from Kriya. PayLater is available in over 45 countries globally and supports GBP, USD, EUR, AUD, CHF currencies.

Are You Innovating or Leaving Money on The Table?

Give global buyers the choice to pay on their own terms and provide a seamless checkout experience with Kriya Paylater. We handle the transaction from end-to-end, with a frictionless buyer journey for buyers across 45 countries. 

• Get Paid Upfront - You’ll get paid upfront, while buyers continue to pay on the terms that suit them.
   
• Offline & Online Sales Channels -  Merchants are able to offer flexible payment terms & payment plans for international B2B buyers across all your sales channels.
  
  
• Avoid Credit Risk - Kriya provides instant & seamless credit checks & authentication at the point of purchase protecting you from credit and fraud risk so you can focus on growth.
  
  
• Single Payment Flow - PayLater is an easy, seamless payment flow with buyer authentication, credit limit setting & automated payment collection.
  
  
• Strong Backing - We’re backed by Barclays, Santander, Northzone & British Business Bank, giving you the reliability you need to trade with confidence.
  
  
• Available in 45 Countries - Merchants can offer PayLater to buyers in 45 countries across Europe, North America, India, Middle East, Asia, Australia & New Zealand. We support a range of currencies including; GBP, USD, EUR, AUD, CHF.
  ‍

‍

PayLater is driving real growth for our merchants:

• 40% Buyer Adoption
• 2x Likelihood of repeat orders
• 45% Revenue Growth
• 4x Increase in acquisition of new buyers

Talk to our team today to find out more about how we can help you