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  • 10.8.6-RISK AND THE RELATION TO TRADE CREDIT-PERFORMANCE RISK

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  • Performance risk

     
     
    The first line of defence against performance risk is a correctly structured transaction. Further safeguards can then be put in place through the use of collateral management, beginning at the point of purchase and ending with the handing over of shipping documents. On the selling side this is more difficult, as it is impossible to know the financial status and health of all potential importers or roasters.

    This is why banks will insist that trade is only with 'authorized buyers' - companies that are known and in which they have confidence. In addition the bank may require that a sales contract is in place before any monies are advanced to buy stocks. In that case selling PTBF facilitates matters. The contractual obligation to supply and accept the goods can be established without the buyer being committed to an actual price long in advance of the actual shipment: only the differential has to be agreed. (Many, if not most, roasters insist on buying PTBF 'buyer's call'.)

    This resolves the performance issue but still leaves open the questions of price and differential risk. Because of this, but also as a general rule, most banks dislike advancing the entire cost of a purchase, often preferring to stick to a percentage of the value, say 80%. This provides reasonable cover against a worst case scenario. This percentage will vary according to the risk rating of the country where the borrower conducts their business, and the bank's assessment of the borrower.