Unlock international trade by managing global business risks

For many businesses, global market expansion can be the key to growth and increased profitability. However, once you enter the world of global trade, even the best-laid plans can go awry. 

Now that the economy has become increasingly global, many companies are working with foreign buyers, foreign suppliers or both. This new way of operating brings risks inherent to international trade, from preventable errors to unforeseen geopolitical events.

For companies pursuing global expansion strategies, being aware of these issues can help minimize the overall risk within global supply chains.

Here are six key international financial risk factors to keep top of mind:
 

1. Commercial risk

A sale isn’t a sale until payment is made. If a buyer is unable to pay for products or services, that affects supply chains and a company’s bottom line. Whenever a supplier (exporter) offers credit without collateral, there is the commercial risk of potential loss if the buyer (importer) doesn’t pay.

Commercial risk management is especially important for international trade transactions where other risk factors (like political or foreign exchange risks) can weigh heavily on foreign buyers. Without assurances in place, the exporter could be stuck without payment.

How can you address commercial risk?

If possible, collect payment before services are rendered or goods are delivered. If cash-in-advance isn’t workable or aligned to competitor standards, supplement with bank-mediated letters of credit, trade receivables insurance or other risk mitigation solutions.

In any case, the strength of your customer relationships will be pivotal to your global expansion success. Try to meet customers in person if possible — even a brief face-to-face meeting can set the tone for more productive contract and payment terms discussions.
 

2. Product risk

The quality and quantity of a company’s goods and/or services help drive sales and build goodwill with trading partners. If products suffer from frequent errors, delays in shipment or customs concerns, it can hurt overall brand reputation with buyers.

Here’s an example: An international vendor developed coffee mugs for a client’s Valentine’s Day campaign. Although the client asked for red mugs aligning with the holiday theme, the mugs the vendor sent were blue — perhaps ideal for Memorial Day but hardly designed for Valentine’s Day.

If this had been a domestic sale, it would likely have been resolved quickly. However, when you are buying or selling products halfway across the world, any mistake could take weeks or even months to resolve.

How can you address product risk?

Beyond recurring internal quality assurance, pre-shipment inspections can help shield a business from international product risk. These inspections reduce the risk of shipping or receiving defective product while diminishing risk linked to internet commerce (such as phishing and fraud).
 

3. Bank risk

This risk lies directly with the foreign banks, who are often a party to international transactions. It’s an inverse factor from commercial risk — if you’re working with a letter of credit, the commercial risk is replaced by bank risk as the burden is shifted to the importer’s bank. If the bank goes out of business, becomes insolvent or fails to properly execute a payment, it could impact a company’s ability to collect from the buyer.

How can you address bank risk?

Research the buyer’s bank before entering into a trade agreement. Consider its reputation, financial condition and overall ratings. If selling on letter of credit terms, ask a bank like U.S. Bank to confirm the credit and take on the obligations of the issuing bank to pay.
 

4. Documentary risk

In the same vein as product risk, documentary risk arises when partners provide improper, incomplete or fraudulent documents associated with an international trade transaction. Just one missing document could grind an entire transaction to a halt, costing both the importer and exporter time and money to resolve. 

How can you address documentary risk?

If you don’t have trade documentation expertise, invest in training. If you don’t have staff available to train, consider a partnership with a firm who specializes in preparing trade documentation. Additionally, if you are transacting on letter of credit terms, many banks like U.S. Bank offer expertise in documentary compliance and can work with you to ensure that a clean presentation is made to the issuing bank.
 

5. Country risk

The largest and most complex risk factor, country risk covers the overall economic, political and legal stability of a country. There are several sub-factors within this international risk category.

• Sovereign risk: related to a nation’s debt obligations or regulations from central banks 
• Economic risk: general health of the country’s economy 
• Political risk: governmental factors or discord from political events 
• Corruption level risk: an index published by Transparency International on corruption within public sectors 
• Legal risk: general structure of the legal system, commercial codes and adherence to the rule of law 

These factors may change over the course of a trade relationship, impacting trade partners at several points of the supply chain.

How can you address country risk?

Try to protect yourself as much as possible from country-specific risk factors. Conduct an analysis of the importing country’s economic and political trends, FX reserves and sector performances, and then consider ways to mitigate those risks that are of concern. Private insurers and the Export-Import Bank of the United States offer trade receivables credit insurance to help shield companies from country risk factors outside of their control.

Additionally, when selling on letter of credit payment terms, banks like U.S. Bank also offer letter of credit confirmations to mitigate country risks.
 

6. Currency risk

When doing business with foreign suppliers, settling invoices in USD may seem like the easiest option for U.S. organizations. Yet transacting in USD can mean you run the risk of being surprised by conversion rates and fees, adding unexpected costs to your transactions.

How can you address currency risk?

These risks can be managed by either paying or accepting payments in the trading partner’s local currency, as the party that controls the currency conversion faces fewer risks. Additionally, the benefits of paying invoices in your supplier’s local currency may include:

• Earning discounts on purchases
• Extending payment terms
• Fixing payment amounts and settlement terms
• Improving trading partner relationships 

Find out if your foreign suppliers are interested in being paid in their local currency, rather than in USD. Often, these discussions lead to mutually beneficial solutions.

Knowing the risks is half of the battle

Each of these global expansion risk factors can adversely impact your business, so it’s vital to understand them and seek out ways to protect yourself.

If you want to learn more about how U.S. Bank helps exporters navigate these international financial risks, contact your relationship manager for more information.