MAJOR RISKS AND CHALLENGES IN EXPORT PROCESS
International trade carried way more risk as compared to domestic trade of goods. It is important to understand the global dynamics and complexities for buyers, sellers, and lenders too. Due to the difference in language, culture, political structure, and currency exporters feel insecure about the payment of their products. Below are the major export risks faced by exporters all over the world:
- The most common type of risk which an exporter faces is regarding their product specifications. Under this type of risk, the exporter must accept their product-related risk as a part of their commitment made during the exportation of goods. The commitments include performance warranties, agreed maintenance of products or services. The buyer must take responsibility for any negligence during the production of goods and extreme weather condition effects on the goods which are shipped. Such scenarios lead to disputes within parties even after the agreements are made. It is of utmost importance that there should not be any mistake in the contract as that could affect the product by default and result in paying compensation for the change in seller’s commitment.
- Another type of risk involved in the export of products is manufacturing risks which are common in tailor-made products or those which have unique specifications or customizations. In such cases, the seller is required to cover the expenses of readjustments of the product until the buyer sees it because that product will not be purchased by other buyers. In this scenario, the buyer must enter int payment obligation way before the time of the transaction. Often, in this case, the payment is made in parts- first partial advance payment and then full payment as the delivery of the product takes place.
- Besides product-related risks, the movement of goods from the source country to the destination country is another major challenge. Shipping and freight risks are reduced by a huge margin through insurance, defined by International Transport Policies. However, if the buyer fails to insure the shipment in a proper way, the insurance will be considered invalid in case it the route of the shipment changes or the products are delivered in damaged condition.
In today’s time when the foreign exchange levels are uncertain, currency risk management strategy of a country needs to be strong. Exchange rate ratio can affect all types and sizes of businesses as these moves can leave a massive impression on your profit margin. Various strategies are used to manage currency risks such as spot contracts (Any business or individual can use this contract to buy and sell foreign currency at the current market exchange rate), FX Options (An FX option provides you with the right to but not the obligation to buy or sell currency at a specified rate on a specific future date) and Forward contracts (Forward contracts refer to ‘buy now, pay later’ products, which enable you to essentially ‘fix’ an exchange rate at a set date in the future (often 12 – 24 months ahead).