The Top 5 Tips to Avoiding Financial Risk in New Export Markets
With Brexit around the corner, below, Kris Macauley, Risk Director at Euler Hermes UK & Ireland, helps exporters move in the right direction.
The UK’s vote to leave the European Union last June provided British businesses with a significant incentive to open trade with new markets and customers overseas. Across the manufacturing sector, more than a third of firms have reported strong growth in export sales in the last quarter, according to the British Chamber of Commerce.
However, exporting does not come without risk. There are a number of economic factors at play which make the waters of the global trade landscape choppy and unpredictable. Brexit, the US president’s call for more protectionist measures and worsening payment terms in China and South East Asia, for example, have created an uncertain backdrop for businesses looking to take the first steps towards exporting.
Overseas trade can be a steep learning curve. The need for companies to be cautious is obvious, but it is common for some firms to overlook the pitfalls of trading abroad that can often restrict growth. While there are challenges, companies should keep the following five points in mind if they want to dodge the bullets and turn a profit.
- Beware of new trade barriers
Political change at key export destinations for British businesses may lead to future problems. Both EU and international markets have seen a recent growth in protectionism and trade restrictive barriers are growing as a result. These can be applied quite quickly and perhaps surprisingly are as common in developed as developing markets.
So businesses should keep an eye on non-tariff measures when assessing current and future markets. Many countries are imposing national standards regarding product quality, food safety or environmental protections to protect home-grown producers.
- Do your research
It’s vital that firms safeguard themselves from risk by doing their homework on the companies they plan to do business with. A good starting point would be to speak with financial and business advisers, their bank or a credit insurer to build a profile of a potential new customer, to gather the information needed to make a more informed decision when offering credit terms.
Important information to research includes country and sector risks and the financial health of the potential partner and its key customers. Armed with this insight, exporters can make decisions on where to trade and who with.
- Understand payment cultures
A good knowledge of payment cultures that exist across global markets and shifting contract terms is vital. Cashflow problems can arise from longer and more segmented payment terms and companies may be required to reassess their financial structures. The average Day Sales Outstanding (DSO) – the measure of the average number of days that a company takes to collect revenue after a sale has been made – for Chinese firms now stands at 89 days, which is significantly above the global average and the figure for the UK, 53. Businesses that are new to exporting can often forget these differences and continue to rely on the payment timelines they’ve been used to in the UK.
- Seek legal advice
It is important businesses don’t assume legal processes are the same abroad as in the UK when entering into contractual agreements.
We recommend businesses seek expert advice to ensure they’re prepared for any situation arising from different legislation governing employment, contracts (sales, rental and buyer agreements), company registration, tax liability and transport. Differences here can significantly affect their ability to successfully export their products or services and recover. Levies and duties may also apply for countries outside the EU, which usually entails additional documentation.
- Watch out for political risks
Political risk should be consistently monitored. Businesses that look to trade with destinations suffering from political instability should be aware of the risk of contractors defaulting on payments, government policy change, such as local trade embargos, transfer exchange blockages and property confiscation.
Opening up new markets with new customers can deliver numerous benefits to a business, from increased sales, more balanced growth with a greater spread of risk and the potential to deliver sharper profit growth. But being vigilant about the potential risks is essential and businesses should take the appropriate measures to protect themselves.