The rewards of exporting are well documented, with the FSB estimating that businesses that sell overseas turn over three times more on average than those that only trade within their borders.
However, the risks are higher too; language barriers, legislative differences and the basic logistics of getting a product from one country to another all raise the chance of something going wrong. As with any risk, the potential problems associated with exporting can all be minimised with correct planning. Here are some of the most common risks you should be aware of, and how to deal with them.
At the time of writing (Aug 2017) the Euro is up 14% against the Dollar in the last month. That means if an American company had agreed to buy $50K worth of French cheese in July, they could potentially find themselves paying $7K more for no extra cheese in September.
This scenario is easily avoidable with a thorough currency risk management strategy. These will be different for each individual trade, but three common elements of a currency risk management strategy include:
Here the two parties agree a price based on the current rate of exchange for a deal due to take place at a designated time in the future. If the exchange rate fluctuates between the two countries, the buyer will still receive the agreed amount at the original agreed price.
This is where the buyer reserves the right to pull out of a deal if the exchange rate changes out of their favour. The advantage of options over forward contracts is that the buyer can still take advantage of any beneficial fluctuations in the exchange rates.
A spot contract is simply where a buyer agrees to purchase and pay for the product ‘on the spot’, thus eliminating any possibility of future exchange rate fluctuations affecting the trade.
While the risk of receiving a faulty product is perhaps no more or less higher than when trading within one’s own country, dealing with the problem can be a lot harder across borders, with legislative differences and communication barriers all posing potential risk.
Who is responsible, for example, if the product arrives different to the original design specifications? Or if the nature of the product means it was damaged in transit?
To minimise the risks for both buyers and sellers it is important to set out a carefully worded contract that states the exact terms of the deal before any payments are made or products are manufactured. It can also be a good idea to separate payments into different stages – for example, a percentage to be paid on agreement of the design, a percentage once manufacturing starts and the remainder on delivery.
When goods have to travel long distances, by sea, air or road, the chances of delay, damage or even loss are greatly increased. It’s important that an export contract covers any eventuality that could arise from the transport of the goods and affect the final price.
Cargo insurance should always be purchased as part of an international trade deal, with the standard international terms usually sufficient to cover any eventuality. Make sure to sort out in advance which party is responsible for arranging the cargo insurance, and whether there are any situations it does not cover. Changing port of delivery due to bad weather or international incident, for example, may mean that goods are not covered on route to the new port, which can cause complications if they arrive damaged or are stolen.
While the majority of overseas customers you will deal with as an exporter will have every intention of playing by the rules, there will always be the exception. The majority of experienced exporters can tell a story about a customer that tried not to pay. Legislative differences and communication barriers as well as the cost of pursuing a customer for missed payment in a foreign country can make recovering any such losses more trouble than it’s worth.
Thorough due diligence on any overseas client is highly recommended. Obtaining a letter of credit from the customer’s bank will demonstrate that have the means to pay, and working with governmental bodies such as UKEF will enable you to insure your trade against any potential losses.
Cash Flow Risks
Payment terms when dealing with large companies in the domestic market can be as long as 90 days. In the export market this wait for payment is doubled. This is because payment terms only begin when goods are received. For many businesses this wait proves a prohibitive barrier to exporting, as they simply can’t afford to have capital tied up in a trade for such long periods of time.
Trade Finance is the most effective solution to this problem. At Jardine Norton our trade finance helps exporters by paying up to 80% of the agreed amount instantly. We also carry out due diligence on a customer and guarantee payment in the event that a customer doesn’t pay. What’s more our unique system allows us to fund many deals that the banks won’t agree to, allowing more businesses to expand into the export market.
None of the above risks should deter you from international trade, as all can be dealt with via adequate research, planning and deal structuring. As the aforementioned FSB figures show, managing these risks and moving into export markets can help a business expand far beyond their current size and take advantage of the vast potential of the global marketplace.