Why is granting credit riskier in an international context?

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Why is granting credit riskier in an international context?

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Why is granting credit riskier in an international context?

Explanation & AnswerSolution by a verified expert

Explanation

Management of the account payables and account receivables for foreign business needs analysis of various aspects. Analysis of the credibility of foreign clients is difficult as very limited information can be obtained from the financial statements. Also, if the financial system in the foreign country is not adequate, debtors would not get funds at the appropriate time. Thus, it would slow down the collection process.
 
Moreover, during the credit period offered to or by the client, the exchange rate may change substantially. This often leads to variations in the amount of final settlement of dues. The economic as well as the business environment in the host country may differ. Thus, it requires the parent company to frame credit policies accordingly. This usually creates differences in the credit policies in the home and host countries. Thus the credit management of the foreign transactions requires special understanding of foreign markets.
 
These factors make granting credit riskier in the international context.

Verified Answer

Credit management is riskier in international markets due to various factors. These include, unstable foreign financial system, exchange rate risk due to time gaps in settlement of dues, poor knowledge of credibility of foreign debtors / creditors.

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