Managing International letters of credit transactions to limit credit risk

As more than ‘90% of trade transactions involve some form of credit (in particular short-term) ...trade-financing is the lifeline of trade’. Routinely, this finance is by way of short-term credit that ‘covers periods not more than 180 days’. It is commonly extended by the seller to the buyer and referred to as supplier’s credit. The extension of credit is not without risk. It is generally accepted that the management of credit risk is vital to the long term success of any firm. This is particularly so for international trade transactions, where foreign legal and regulatory systems, cultures and customs contribute to a changed business environment that may produce unexpected results. In such an environment, the issue of payment is at the core of credit risk management which is the main focus of this paper.