By Marine Bochot, UK head of risk at Euler Hermes
Foreign trade has always been a cornerstone of the British economy, and with economic growth facilitating a rise in business confidence, the number of firms exporting is on the rise. This is particularly visible among the SME sector. According to a recent report from YouGov, the number of SMEs expecting to export in 2016 is growing and those already trading overseas are looking to expand the number of markets they trade in.
However, exporting does not come without risk, and for many firms new to foreign trade it can be a steep and difficult learning curve. Businesses should be cautious and ensure they avoid the pitfalls and financial problems from trading abroad. However, keeping the following five factors front of mind for each current and future export market will help pave the way to export success.
1. Currency fluctuations
Fluctuating exchange rates are particularly difficult to budget for, and shifts can significantly impact product demand in foreign markets should prices be pushed up, swallowing profits and putting pressure on bottom lines. The current strength of the pound is having a marked impact on UK exports, particularly across the Eurozone, and firms should keep a close eye on currency changes across all their respective markets and adapt product strategy accordingly.
2. Trade barriers
Both EU and international markets have seen recent growth in protectionism, with trade becoming more segmented as advanced economies move to preserve market share in the wake of growing involvement from emerging nations. In light of this, trade-restrictive tariff barriers are growing in number, which can have a negative effect specific products margins in certain countries – for example, Turkey recently raised customs duties on imported footwear by 50 per cent.
Firms should also keep an eye on non-tariff measures when assessing current and future markets. Many countries are increasingly imposing national standards regarding product quality, security food safety or environmental protection to protect home-grown producers.
3. 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.
4. 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, and businesses may be required to reassess their financial structure, particularly supplier payment contracts, to adjust accordingly. Firms that forget this and continue to rely on a certain Day Sales Outstanding (DSO) figure for receiving revenue may find themselves in difficulties.
5. Legal risk
There can be major differences in law across different markets, and firms need a good understanding of how these could affect their ability to successfully export their products or services or recover monies as securities operate very differently – ROT for instance. It is particularly important not to assume legal processes will be the same as the UK when entering into contractual arrangements.
Expanding export operations can bring a business many advantages, such as increased sales, opportunities for more balanced growth, more employment and bigger profits, but firms must be vigilant about the potential risks and take the appropriate measures to protect themselves.