How to manage customer and exchange rate risks in foreign trade transactions

In foreign trade business, although it is gratifying to receive an order, this is only the initial stage of the transaction process. Uncontrolled customer risks and fluctuating exchange rate risks may lead to a loss of funds and goods. How to identify and manage these risks is discussed in detail below.

Identify customer risks

Customer risks mainly include problems such as customer company bankruptcy, fraud, cash flow interruption, and deliberate delay in receipt of goods. To effectively deal with these risks, one should first conduct an in-depth investigation into the background of the client company. You can confirm the authenticity and strength of the customer through the following methods:

1. Use Google Satellite Map: Look up customer addresses and verify the existence of the company.
2. View the company website: Understand the company’s establishment time, experience and projects, and analyze its market influence.
3. Social Media Search: Assess the number of employees and their overall size.
4. Retrieve negative news: Retrieve negative reports or debt issues of the client company to prevent potential default risks.

For old customers, you should pay attention to changes in their ordering habits. For example, if a customer suddenly triples the order amount and changes the payment method, the reason should be investigated promptly, which may imply that the customer is facing a cash flow crisis or a risk of market expansion. In this case, communication with customers and hiring a local third party to conduct on-site inspections are particularly important.

Understanding exchange rate risk

In foreign trade transactions, the impact of exchange rate fluctuations on profits cannot be underestimated. In 2018, the Turkish lira depreciated sharply, leading to a lack of confidence in foreign investment. This phenomenon is not an isolated case. Other emerging markets such as the Brazilian real have also experienced significant depreciation. Mainly affected currencies include the Venezuelan bolivar, Argentinian peso and South African rand. This currency depreciation has a direct impact on import volumes, order acquisition and customers’ willingness to pay, which in turn affects the overall profits of the company.

In summary, when conducting transactions, foreign traders can effectively manage and control customer risks and exchange rate risks by comprehensively investigating customer backgrounds, observing changes in customer behavior, and paying attention to exchange rate dynamics. This is critical to keeping your money safe and your business healthy.