Marine Bochot, UK head of risk at Euler Hermes, provides her top tips for SMEs who are considering exporting.
The increasing ease with which companies are able to conduct business across the globe means that many SMEs are exporting sooner rather than later. More than 60% of businesses expect to be exporting by 2016, taking advantage of opportunities overseas to grow their sales and profits.
But, as we can see from the economic slowdown in China and current financial market turbulence, exporting does not come without risks and for many firms new to foreign trade it can be a steep learning curve. Businesses should be cautious and ensure they avoid the pitfalls and financial problems that trading abroad can present. Keeping the following five factors front of mind when making decisions about where to trade and who with will help pave the way to export success.
1) Get help assessing the information
Firms should do their homework to help guard against future problems by finding out as much as possible about the companies they are planning to do business with. Business partners such as a credit insurer have expertise in building profiles of potential new customers, so businesses will have the information needed to make a more informed decision when offering credit terms.
Key information to research includes building a profile of the partner’s country risk, sector risks and the financial health of the potential business partner and its key customers. Armed with this type of information exporters can make more informed decisions about where and whom to trade with.
2) Be aware of geo-political risk
Political instability at export destinations can either disrupt or, in some cases, prevent the completion of an export contract. Companies trading in these markets risk contractors defaulting on payments, exchange transfer blockages, property confiscation and changes in government policies. These may include local trade embargos which will affect both the flow of goods and accrued revenue.
For example, the Ukrainian crisis prompted a number of governments, including the USA, UK and EU, to apply sanctions against individuals, businesses and officials from Russia and Ukraine. In return, Russia imposed reciprocal sanctions and import embargos, all of which had huge and immediate impacts on supply chains for companies trading with Russia.
3) Understand payment cultures
UK firms must have a tight grasp of the payment cultures that exist across global markets as they are likely to differ significantly from what they are used to. Longer and more segmented payment terms are possible – even in sectors like food – and businesses may be required to reassess their financial structures, particularly supplier payment contracts. Failure to do so could lead to potential cashflow problems, which could be crippling for SMEs.
4) Don’t trip over the trade barriers
Both EU and international markets have seen growth in protectionism recently, with trade becoming more segmented as advanced economies move to preserve market share in the wake of competition from emerging nations. In light of this, trade-restrictive tariff barriers are increasing in number and variety, which can have a negative effect on sales. A while ago for example, Turkey increased the tax on imported footwear sales by 50%.
Firms should also keep an eye on non-tariff measures when assessing current and future markets. Many countries are increasingly imposing tougher national standards regarding product quality, security, food safety or environmental protection to protect home-grown producers.
5) Beware legal risk
Major differences in law exist across various markets, and businesses need a good understanding of how these could affect their ability to successfully export their products or services or recover monies as securities. It is particularly important not to assume legal processes will be the same as the UK when entering into contractual arrangements. Larger companies may have a legal team that is responsible for addressing these challenges, but SMEs equally need to seek expert advice to ensure they are prepared for any situation that may arise.
Finally, don’t be afraid to ask for help. Business partners such as credit insurers can help firms looking to export assess the risks and minimize potential problems. They can also provide reassurance to credit suppliers and banking partners, create more headroom for working capital, offer more competitive credit terms overseas and enhance the quality of in-house credit management.
Expanding exports can bring a business many competitive advantages, such as increased sales, opportunities for more balanced growth, more employment and bigger profits. As the world gets smaller the opportunities for SMEs increase, but before jumping in it is essential businesses prepare against potential risks and take the appropriate measures to protect themselves.