Trade risk management

At NAB, you have access to our experienced Supply Chain Finance specialists. These specialists can discuss all aspects of trade transactions, and can provide solutions that are tailored to your business needs.

Listed below, are a number of common issues that need to be considered by importers, exporters and local traders before entering into a contract of sale with another party. These issues are a common cause of problems experienced with trade and our Supply Chain Finance specialists can assist you to determine the most appropriate method of payment and provide solutions that will help manage or minimise these risks.

Goods are not in accordance with the contract of sale
Goods do not arrive within the time required
Goods are damaged or lost in transit
Credit risk
Transfer risk
Exchange risk

Goods are not in accordance with the contract of sale
Importers/buyers should ensure that the need for legal action does not arise as this may necessitate enforced payment by the importer/buyer, who will not be able to onsell or recoup their costs due to the fact that the goods received are not what was required or ordered. If the importer/buyer has an agent in the supplier's country, closer supervision by the agent may be maintained over the shipments. Also, by arranging an independent superintendence company to inspect the goods prior to shipment may be possible, however, this can be expensive. A safeguard when dealing with a new supplier, is to thoroughly investigate the reputation and standing of the supplier and the product, prior to orders being placed.

Goods do not arrive within the time required
The contract of sale should be specific if the date for shipping goods is vital. A letter of credit can specify a latest shipment date and if this is not met, this may allow the importer clear legal grounds for refusing payment.

Goods are damaged or lost in transit
Normal marine insurance can be obtained to cover the risk of damage to, or loss of, the goods in transit. The cover to be obtained, should be discussed between the importer and exporter, and should be included in the terms of the contract of sale. If any doubt exists, then independent advice from an insurance broker specialising in international transport is recommended.

Credit risk
The risk of insolvency, default, fraud or unwillingness to accept the goods on the part of the importer, is termed 'Credit risk'. NAB is able to seek a commercial report on potential trading partners to assist companies make informed decisions on the bona fides and commercial standing of buyers. Australia's government authority, - Export Finance Insurance Corporation (EFIC), is responsible for supporting banks and exporters in promoting export trade. EFIC also offers a range of insurance products that can be used, in conjunction with NAB's products, to mitigate many trade related payment risks. There are also local trade insurers who can assist with your domestic trade needs.

Transfer risk
When a contract of sale specifies payment is to be made in a particular currency, a 'Transfer risk' can exist when exchange or trade controls are introduced in the country of the importer, which prevents the payment in a currency other than the importer's domestic currency. However, if the method of payment used is a letter of credit, it is generally the case that the issuance of the letter of credit indicates that the transfer of a specified currency will be approved when required. Weakness in the economy of the importer's country, a country's low level of external reserves and balance of payments problems, all may indicate that the possibility that transfer difficulties may occur. Protection can be obtained by insuring with an export credit insurer, such as EFIC.

Exchange risk
When negotiating the terms and conditions of a contract of sale, importers and exporters may need to deal in a currency other than Australian dollars. Consequently, when a contract of sale is agreed upon in a foreign currency, an exchange rate fluctuation risk occurs from that moment on until hedging mechanisms are put in place or payment is made.

A small exchange rate movement can have a substantial effect on the amount of money companies receive or pay, especially if there is not much room for movement in the profit margin. In managing exchange rate risk, companies have several alternatives available. In Australia, NAB provides:

• Forward exchange contracts
• Variable forward exchange contracts
• NAB Foreign Currency accounts