Trade Credit and Financing Instruments

CHAPTER 4

Credit Risk Framework for Trade Credit Financing Exposure

Introduction

Trade finance represents an important lending portfolio for financiers. An important characteristic that attracts investments is the risk mitigation that trade receivables determine for lender exposure. Because trade finance is developed based on commercial relationships that existed prior to the origination of the lending exposure, evaluation of the risk mitigation determined by the trade credits requires an ad hoc approach in the development of a credit risk framework. In particular, the preexisting trade relationship, the legal framework governing the transfer of trade credits, and the management of receivables can affect the extent of risk mitigation for the ...