How can we minimize foreign trade risks?

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How can we minimize foreign trade risks?

Inadequate cover, invalid contractual clauses: things to remember to help avoid mistakes when expanding abroad. Nothing can replace thorough, advance planning. If you prepare well, you can avoid serious problems in international trade.

There is no question about it: Trading abroad has its risks. But if you know the potential pitfalls, you can minimize the risks and exploit, the opportunities of expansion more fully. Here are our top tips on planning your foreign business strategically and operationally:

1. Get to know the business customs of the country : Problem: Sometimes there is the tendency to approach meetings with prospective customers abroad too directly, which can be a real intercultural blunder.

Tip: When entering new markets, you must learn about the business customs of the target country in advance. The same goes for the conventions of interpersonal interaction, the dos and don’ts of business meetings. Consult experts who know the target region well its economy, politics, and culture. Consulting an intercultural skills coach beforehand can help give you a better idea of your business partner in your target market and avoid possible mistakes in your initial meeting.

2. Seek out expert consultants for your company : Problem: Medium-sized companies have specific needs, as do large corporations and start-ups. The best advisor can’t optimize your approach if they aren’t a good match for your company.

Tip: The company should involve the foreign trade experts of its principal bank from an early stage. These experts can help conduct contract negotiations effectively and set out appropriate payment-related contractual clauses for the client. Once that is done, the transaction can be financed and secured optimally.

Ideally, your principal bank will already be involved in the initial planning phase, before the export strategy is set, the deal closed, or the first steps taken in a new export market.

3. Involve competent partners in good time: Problem: An exporter closes a contract without receiving advice on the buyer’s creditworthiness and solvency, the details of the contract, and possible insurance coverage for the payment. The contract terms are therefore fixed and can no longer be modified.

Tip: The entrepreneur should involve competent foreign trade experts at their bank in good time. These professionals can provide valid support during contract negotiations and the definition of appropriate contract clauses to regulate payment. This ensures optimum financing and insurance coverage for the transaction. Ideally, the exporter’s bank should be involved right from the initial planning stage, before defining the export strategy, closing the contract and deciding to enter a new export market.

4. Count on an intensive collaboration : Problem: Companies often forgo comprehensive advice because of time or cost considerations.

Tip: Be wary of false economies. When doing business with foreign partners, you need experts who know these markets and countries, both in the legal and financial sense. Time and money are usually well invested in a solid support network that contributes to risk minimization down the line.

An intensive, long-term, and trust-based collaboration is always an excellent starting point and, the bottom line is, it usually saves time, money, and mistakes.

5. Conduct a strategic dialogue : Problem: Companies, company goals, and market situations can change.

Tip: The company should regularly review its general international strategy and the coverage of individual transactions with its principal bank (at least once a year and in good time before concluding any contracts). This gives you the opportunity to analyze changed risk factors, and to adjust the financing solutions to the needs of the company and to the level of risk.

6. Utilizing innovative options: Problem: Companies often only make use of traditional instruments such as letters of credit or guarantees to safeguard their international business transactions. As a result, they miss out on current finance solutions, such as supply chain finance or factoring, that offer a number of advantages!

Tip: Markets and suitable solution approaches develop very dynamically. It is, therefore, worth being open-minded. For example, working capital analysis and the optimization of payment flows with supply chain finance or factoring based on this are well-established methods for medium-sized companies to secure and optimize payment flows.

The bank payment obligation (BPO), a relatively new hybrid of letter of credit and open account, combines the advantages of the two products (the option of securing with letter of credit and the flexibility of payment with open account).

In some Central and Eastern European countries, suppliers carry high financing risks and costs. By choosing the appropriate foreign trade instrument, they can help their customers finance the transaction without assuming any risk on their part (for example, by granting longer payment terms that are secured through their principal bank).

7. Consider currency risks: Problem: As a rule, companies are quick to identify the country risk and credit risk of international business. However, they tend to underestimate the possibility of losses due to currency risks.

Tip: Take all the risk exposures into consideration. In China, for example, the renminbi has been strongly devalued against the US dollar since summer 2015. European companies have subsequently reduced their payment terms- reason enough for companies to secure their international business transactions against currency risks.

8. Consider legal regulations: Problem: Even within the EU there are countless legal particularities to consider in contracts with foreign partners – both as an importer and exporter.

Tip: Company bosses can research current conditions of sale, customs regulations, and relevant legal framework conditions and details with their chamber of industry and commerce or with the region’s foreign chamber of commerce. This is important so that these details can be taken into consideration at an early stage when drawing up contracts and designing the respective hedging instruments.

No company should forgo the expertise of a lawyer specializing in the respective country. Company bosses should also clarify issues regarding guarantees, the rectification of problems, and possible legal disputes beforehand.

9. Keep your company’s operational expertise up to date: Problem: Task setting in international business is notoriously complex – the risk of making mistakes high. Around 80% of letter of credit documentation is erroneous.

Tip: Every company director should therefore aim to uphold and improve quality standards in the operative business. External sources, for example the internet, and partners such as lawyers and foreign chambers of commerce, can help in that regard. Some banks, UniCredit among them, offer free training sessions and seminars for foreign trade experts within companies, for example on important legal changes to letters of credit, or they make available template texts showing how to formulate a letter of credit for specific high-risk countries, and provide assistance with preparing necessary documentation.

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