Exporting goods to other countries can be a source of significant growth for businesses in the form of new markets and opportunities. In the process, these businesses are likely to face new risks, especially when it comes to managing payments, that they may not have encountered or experienced before.
With careful management, companies can understand the impact new risks are likely to have on the business and how to mitigate these risks on their own or with the help of third parties, like insurers.
Not all of these risks will have the same significance. Some payment risks can lead to unexpected levels of bad debt that have devastating consequences for a business. Other situations involve risks that only lead to short-term concerns, such as sporadic delays in payment.
Unfortunately, it is not always immediately clear which risks can lead to which set of consequences. Therefore, managing an export business begins with a clear recognition and understanding of all of the risks that business faces and the level of those risks.
With that insight, companies will be able to monitor and manage those risks as needed. It is when companies do not understand or recognize the inherent risks of export businesses that real problems occur. Looking the other way and hoping for the best is not a viable export risk management strategy.
Risks that catch business leaders by surprise can be particularly devastating to business performance and profitability. To avoid this, companies can leverage a range of tools and solutions to manage the risks in export business, credit insurance, and stricter payment terms for higher risk customers. Learn about risks involved in exporting and how to manage them.
What is Export Risk Management?
Export risk management is not about eliminating risks. There is no such thing as risk-free business, especially when working with business partners and customers in other countries. Instead, risk management is about taking steps to ensure that a company knows what and how much risk it faces and how much of that risk it is able to mitigate.
These steps to stronger export risk management can help businesses focus on both individual risks and the entire portfolio of export risks they face.
- Identify all potential risks.
- Rank each risk according to the likelihood of occurring and potential severity. These risks can include macroeconomic risks, such as the risk of inflation; political risks, such as civil unrest or economic sanctions in a given country or region; and business-specific risks, such as the potential for decreased market demand and changes to customers’ creditworthiness.
- Evaluate strategies to manage these different types of export risks, including developing customized payment terms, targeting business partners only in specific locations or industries, and insuring against specific and significant risks where possible.
- Monitor risks over time as circumstances and conditions change and adjust risk management and mitigation approaches according to new information.
A strong export risk management approach allows companies to do business with a larger number and variety of international business partners. A company with strong risk management can more confidently extend credit and favorable payment terms in order to increase growth and solidify critical business relationships, while also investing in other customer relationships slowly over time when necessary.
For example, when an otherwise good customer wanted payment terms for a larger-than-normal order, one export company recognized that it would not be able to absorb the loss if something should go wrong. Because the company did not want to miss out on the growth this deal would create, the company began taking a more proactive risk management strategy for its export business, including purchasing credit insurance for its accounts receivable. With that strategy in place, the company is now able to approve credit limits faster and offer financing on open terms where its competitors can’t.
What Are the Types of Export Risks?
There are many types of export risks. While doing business internationally, companies may be affected by more extreme changes in the political environment or fluctuations in business and macroeconomic indicators than they might encounter in domestic markets. Business norms and cultures differ. Currency exchange rates rise and fall. Changes to the business, political and legal environment can all impact companies doing business in a given country or region.
Exporters can face significant political risks when doing business in various countries. Some of these risks are established and well known while others can arise quickly and unexpectedly. A new election, sanctions or pressure from other countries’ governments, and civil unrest can all rapidly change a political situation. In general, the more stable a country’s business, financial and social systems are, the less political risk that country represents.
When the political situation in a country changes or deteriorates, companies operating or doing business in that country could face a range of problems. Governments could seize assets. Businesses may have trouble moving money in and out of the country. Customers could default on payments if their businesses suffer during times of political turmoil or changing government policies.
Because political risk can be difficult to predict or mitigate directly, export businesses can focus on closely monitoring the political situation in the countries in which they operate. With a clear process in place, the company can take steps to limit their financial exposure—for example, by reducing credit limits for customers in that country—as soon as the situation appears to be deteriorating to minimize potential losses. Certain insurance policies, including credit insurance, may also provide coverage for losses related to changes in the political environment.
Laws and regulations vary around the world. What is common practice in one country may not be so in another. As a result, exporting companies could face legal issues related to a number of areas of the business, including customs, contracts, currency, and the liability and intellectual property rights involved with the products they sell.
One of the best ways to mitigate the legal risks of exporting is to hire legal advisors either located in a given country jurisdiction or with proven expertise in dealing with local laws. The last thing a company wants to do is get bogged down in a prolonged legal dispute in an unfamiliar country that involves local legal issues. Relying on trusted legal advisors can go a long way toward avoiding and even anticipating and proactively dealing with potential legal issues.
Credit & Financial Risk
When doing business internationally, the risk of nonpayment or default by customers is one of the key issues exporters must deal with. Indeed, export credit risk is among the most significant financial risks a company can face. Getting a delinquent customer to pay is difficult even when that customer is down the street. It can be exponentially more difficult when that customer is in another country.
Even assessing the creditworthiness of an international customer can be difficult. Not all countries have detailed information about a customer’s past credit history or current creditworthiness. To mitigate these credit risks, exporters often rely on payment in advance or credit guarantees, such as letters of credit, before making shipments. Unfortunately, taking these steps could delay shipments or exclude potential customers that are unable or unwilling to provide these documents, causing exporters to lose out on business opportunities.
Export credit insurance is perhaps the most effective way to deal with export credit risk. In addition to providing payment in the event of a customer default, credit insurance can also provide important credit information about current and potential customers, allowing exporters to make more informed credit decisions.
Once goods are shipped, a customer may register complaints about the quality of those products. This could be a genuine objection based on the buyer’s specific requirements and expectations. It could also be a way for the buyer to gain leverage and negotiate a discount on the shipped products after the fact.
One way to deal with quality risk is to hire an independent third party to inspect the goods before they are shipped. If that is not possible, the exporter can send samples to the importer or end customer so that they can inspect the products themselves and determine whether the quality is acceptable before any order is shipped.
Transportation and Logistics Risk
Making an export sale is just the beginning of the process. The sold goods now need to be promptly and safely shipped to the customer. This is where exporters can encounter a range of transportation and logistics risks, which can vary based on the goods being shipped and the requirements to do so. Some goods require refrigeration, must not be exposed to excessive heat or cold, or have an expiration date. Other goods are extremely fragile, require careful handling or must be assembled before delivery to the customer. All shipments must be tracked. If something goes wrong, the buyer may try to negotiate a price reduction or reject the shipment altogether.
Mitigating transportation and logistics risks often involves quality control and careful tracking procedures throughout the process. Specialist transportation and logistics firms can also bring expertise to this effort and some insurers offer coverage for losses caused by delays and problems during shipment.
Language and Cultural Risk
Doing business with importers and customers in another country requires a certain amount of trust. Differences in language, culture, religion and many other aspects of life require careful handling. For example, when exporters and their customers speak different languages, important details and nuances can get lost in translation.
Different cultural mores can impact everything from “normal business hours” to ethical behavior to whether customers will want to buy a product. There are many areas where well-meaning exporters can unknowingly create tension or cause offense to customers, government officials and others important to timely product shipments and other aspects of the business.
The best way to prevent these types of problems is to have people on staff who speak the local language or have experience living in a particular culture or region. In addition, exporters can focus on building local business relationships in the countries that are importing its products to help smooth out problems as they occur and increase the exporters ties and presence locally.
When to Get Export Insurance
While some export risks can be managed and mitigated with the right staff, attention to cultural nuance, and local resources, other export risks may be large enough to warrant export insurance.
When deciding whether to obtain insurance coverage for specific export risks, it is important to evaluate each risk and compare the cost of insuring with the potential benefits of doing so. In some cases, having insurance coverage for a specific risk provides not only protection but helps nurture the confidence necessary to expand and diversify the business.
Here are some of the insurance coverages that can be helpful to exporters:
- Export credit insurance provides protection against customer payment default and, often, against unpaid invoices caused by non-credit risks, such as political events.
- Political risk insurance can protect against loss caused by political events and turmoil.
- Transportation and logistics coverage can cover losses caused by problems and delays getting products to customers in the importing country.
No single approach is likely to meet a company’s needs. Instead, the right mix of strong risk management, risk mitigation activities, and insurance coverage for specific risks can create a program that meets an exporter’s unique needs and circumstances. Learn more about Export Credit Insurance with Euler Hermes here.
How to Mitigate Credit Risk in International Trade
Most export risks are country specific. Some are obvious, such as political instability, and others are less so. Identifying and understanding the extent of these risks is a good first step toward strong overall export risk management. The Organization for Economic Cooperation and Development provides country risk classifications. Euler Hermes also offers more detailed country risk reports exporters can use plan and manage international trade.
For more information, learn more about using country credit ratings here.