Managing Risks of International Business

November 16, 2009
By Michelle Kelley

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Reprinted with permission from Ralph Bocchino, our local trade representative from HSBC Bank USA, N.A., (315) 538-8001.

Many businesses think it’s too risky to do business internationally, or they think they’re too small or that there are too many regulations.

Businesses can come up with plenty of excuses, experts say, but there are just as many solutions.

“Many companies have exaggerated perceptions of the risks and difficulties of exporting, and are not aware of the risk mitigation strategies (including trade financing) and technological and logistical advances that make exporting cheaper and easier,” the U.S. Export Strategy Report notes.

“A big risk for potential exporters is not exporting,” says William Zarit, deputy assistant secretary for international operations with the U.S. Foreign Commercial Service. “We have ways of minimizing financial risks, political risks.”

A company can negate a great deal of risk, says Leslie Schweitzer, a trade specialist with the U.S. Chamber of Commerce, if they follow the same rules they follow doing business domestically. “Sometimes companies get romanced by it all,” Schweitzer says.

“Do your homework, very thoroughly. It is critical to know exactly who you are doing business with and to take a conservative approach,” says Simon Constantinides, head of Trade & Supply Chain HSBC Bank USA. “Don’t be greedy. Sometimes a deal that seems too good to be true in terms of profitability or size is just that, too good to be true.”

After that, the main concern businesses have is whether they’ll see the buyer’s money.

“You must be cognizant of the risk of nonpayment. That’s always an issue,” says Constantinides.

Asking for a letter of credit is one solution, he says. “However, the structure, form and issuer are critical elements of the letter of credit. There are differences in regional practices, and each company is different, so you may be asked to consider other options, such as open account or a structure with deferred payment terms.”

If that’s the case, Constantinides says, it’s more important than ever to know with whom you are doing business.

There are also programs available through the U.S. Export-Import Bank, a federal agency, that can help finance export sales with loan guarantees, working capital guarantees and credit-insurance. And there are ways to work with financial partners to minimize risks of currency fluctuation.

Constantinides advises that companies doing business internationally understand the risks that their buyers face and how such risks could in turn impact them.

“Does your buyer have a good relationship with its financial providers? Is your relationship with the buyer strong enough to build a substantial relationship, or will they likely close shop overnight? Take an approach which we call Vertical Awareness—as if you owned the end-to-end supply chain.”

A recent survey by UPS found nearly half the companies with global supply chains fear major disruptions but aren’t doing enough to mitigate their risks. One out of 10 companies doesn’t monitor suppliers for anything.

Using tools such as the Commercial Services’ country guides, which detail economic and political situations, trade barriers and best prospects, can help identify risks.

“You can negate a great deal of the risk,” says Schweitzer. Using resources on the ground can help companies find the right partner, the right product and the right financing, she says.