How do banks assess the creditworthiness and reputation of foreign buyers and sellers?

1 Credit reports and ratings

One of the most common and widely available sources of information on the creditworthiness and reputation of foreign buyers and sellers is credit reports and ratings. These are reports and scores issued by independent agencies, such as Standard & Poor's, Moody's, or Fitch, that reflect the credit history, financial performance, and default risk of a company or a country. Banks can access these reports and ratings through various databases, such as Dun & Bradstreet, Experian, or Equifax, and use them to compare and rank the creditworthiness and reputation of different borrowers or guarantors. However, credit reports and ratings may not always be accurate, timely, or comprehensive, especially for smaller or newer companies or countries with less developed financial systems.

3 Financial statements and ratios

A more direct and detailed way that banks can assess the creditworthiness and reputation of foreign buyers and sellers is by analyzing their financial statements and ratios. Financial statements are documents that show the income, expenses, assets, liabilities, and equity of a company or a country over a period of time. Financial ratios are calculations that measure the profitability, liquidity, solvency, efficiency, and growth of a company or a country based on their financial statements. Banks can request financial statements and ratios from their potential clients or from public sources, such as stock exchanges, central banks, or international organizations, and use them to evaluate the financial health and performance of different borrowers or guarantors. However, financial statements and ratios may not always be comparable, consistent, or transparent, especially if they are prepared under different accounting standards, audited by different firms, or influenced by different factors.

5 Bank-to-bank communication and cooperation

A more collaborative and interactive way that banks can assess the creditworthiness and reputation of foreign buyers and sellers is by communicating and cooperating with other banks that have direct or indirect relationships with them. Bank-to-bank communication is the exchange of information, opinions, or recommendations between banks on the financial and non-financial aspects of their mutual or prospective clients. Bank-to-bank cooperation is the establishment of agreements, arrangements, or partnerships between banks to share resources, risks, or benefits in facilitating cross-border transactions. Banks can communicate and cooperate with other banks by using various channels, such as letters of credit, correspondent banking, syndicated loans, or trade finance networks, and use them to leverage the expertise, experience, and trust of other banks. However, bank-to-bank communication and cooperation may not always be feasible, efficient, or secure, especially if they involve multiple parties, jurisdictions, or regulations.

By using these methods and tools, banks can assess the creditworthiness and reputation of foreign buyers and sellers more effectively and efficiently, and thus reduce their risks and increase their opportunities in international trade. However, these methods and tools are not mutually exclusive or exhaustive, and banks may need to combine or complement them with other factors, such as their own policies, preferences, or intuition, to make the best decisions for each case.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?