International Risk Management: Credit Risk Management for International Trade

International trade opens up enormous growth opportunities for companies. New markets, new business partners, greater turnover volumes – the potential is huge. But where there are new opportunities, risks can also increase: currency volatility, political instability, country-specific creditworthiness profiles and unclear legal frameworks confront companies with complex challenges.

A central element for making international activities secure is strong credit risk management, embedded in a holistic risk management system. This article discusses the risks that are present in international trade, how these can be kept under control using suitable measures and the future role of technology.

International Risk Management: Challenges and Risks in International Trade 

What is International risk management – and why is it important? Essentially, the aim is to identify risks, assess the likelihood that they will occur, analyze the potential impact and decide on appropriate measures – across international borders and with different currencies.

Typical international credit risks include:

• Payment defaults due to lack of creditworthiness or financial instability in the partner country
• Currency risks, for example through sudden exchange-rate fluctuations
• Political risks, such as export restrictions, expropriations or sanctions
• Legal uncertainties in relation to debt collection and contract security 

A classic example: A European mechanical engineering company delivers to a country with a volatile currency. Through the devaluation of the country's currency, the customer is suddenly bankrupt – the unpaid invoice amount becomes a total loss. A functioning risk management system would have provided information at a sufficiently early stage about security possibilities such as currency hedging or a pre-payment clause.

Successful Credit Risk Management as the Core of the International Risk Management

Effective credit risk management is the central pillar of every international risk management system – it protects you from payment defaults, secures liquidity and creates trust in relation to new business partners. But in an international context the rules of the game are different from those that apply domestically: different legal systems, economic practices and regional risks make creditworthiness checks and security measures significantly more complex. Good credit risk management includes:

• Creditworthiness evaluation on the basis of data from international information agencies
• Determination of individual, regional or country-specific credit limits
• Use of commercial credit insurance
• Evaluation of, and securing against, country-specific risks 

Depending on the type of business – whether standard products, project-specific orders or large-scale projects – the requirements for credit management differ considerably. Whereas for standard business, simple creditworthiness checks and national payment terms are often sufficient, more complex business projects require more detailed payment plans, individually agreed collaterals and flexible financing concepts. In such cases regional expertise, access to country-specific information agencies and the inclusion of local, specialized employees are essential in order to make well-founded decisions.

An internationally viable credit risk management strategy relies on a globally coordinated but regionally differentiated credit policy system. This needs to take into account international minimum standards as well as country-specific specialities – for example in the evaluation of legal forms, creditworthiness information, balance sheet analyses and political risks. To secure business transactions, instruments such as letters of credit, forfaiting, guarantees and commercial credit insurance can be used. In many countries, legally enforceable retention of ownership does not exist and therefore adapted contracts are needed. 

Payment terms also vary considerably depending on the region: in southern Europe and parts of Asia delays in payment are very common, which needs to be considered both in the pricing and the risk evaluation. Dunning procedures also differ: whereas within the EU structured processes are the norm, in other regions out-of-court settlements or local arbitration systems dominate.

The aim is to achieve an objective risk evaluation through the use of structured processes. The key to success lies in a sophisticated approach that is adapted to your strategy. Depending on the volume and frequency of business, companies should build up their own expertise or make targeted use of external experts, specialized service providers and software. Only in this way can credit risks be both recognized and actively controlled. Technologically supported processes, real-time data analysis and clearly defined workflows form the backbone of future-orientated international credit risk management.

Effective International Risk Management through Technological Support

Today, the use of modern technologies is decisive for the efficient management of international credit risks. Software solutions such as  CAM Industry & Trade from SCHUMANN offer tailor-made support for companies that operate internationally.

The advantages of such solutions:

• Automated creditworthiness checks for international business partners
• Real-time monitoring  of risks in the supply chain
• Inclusion of KYC requirements and compliance databases
• Integration into existing ERP systems

In addition, modern systems offer the possibility to establish early warning systems, which notify you about payment irregularities, geopolitical changes and industry developments. Such tools provide a well-founded decision-making basis and help in making decisions not only faster but also better.

Future Perspectives: Trends and Developments in International Risk Management

Which trends will influence international risk management in the coming years?

1. Big Data & Predictive Analytics
   The data-based development of prognosis models enables early recognition of risks on the basis of global data streams.
2. Sustainability & ESG
   With legislation such as the German Supply Chain Act, there is now more focus on social and ecological risks. Companies now need to manage not only payment defaults but also reputation and compliance risks.
3. Cyber risks in the supply chain 
   Global supply chains are increasingly digitally networked – and therefore vulnerable. Cyber security has become an integral part of risk management.
4. Global uncertainties and geopolitical changes 
    Trade conflicts, wars and economic decoupling of individual markets continually result in changes that companies must react to flexibly.

How can an effective early-warning system be implemented? Through automated interfaces to data sources such as business information agencies, political risk indices and ESG ratings, combined with AI supported analysis, companies can recognize critical developments early and react quickly.

Summary: International Risk Management as the Basis for Sustainable Success 

International trade offers many opportunities – but also a lot of risks. For long-term success you need more than just good products: a well-thought-out, data-based and technology-supported risk management system is a central competitive factor today.

Overview of the Most Important Conclusions:

• International credit risk management requires specific processes, tools and know-how.
• Preventative risk identification, reliable risk evaluation and immediate measures secure liquidity and the ability to continue operating.
• Software solutions such as those from SCHUMANN help in making data-based decisions and controlling risks transparently.