7 Smart Steps to Minimize Risk
Inherent risks exist in trading globally that businesses don't have to deal with when they keep things closer to home. But the rewards of expanding to new markets can far outweigh those hazards, especially if you take the following steps to minimize and manage your exposure to risks.
1. Do your research. Be aware of what's going on in global markets at a macro level. The World Bank's ease of doing business index is a good resource; it provides insight into business regulations in 190 economies. Trade credit insurers can be another valuable resource, as they keep tabs on economic developments in a range of markets and sectors.
It's also vital to be aware of any cultural elements of doing business in different markets—a big faux pas can affect the way your overseas partners see you, or even end a business relationship.
2. Don't jump too quickly into a new trading relationship. Companies new to exporting are often tempted to quickly seize an opportunity. They shortcut the documentation process or fail to have in-house counsel or an external lawyer make sure contracts, payment, and shipping terms are watertight. This can have grave consequences down the line.
3. Get close to the market and the customer. Many exporters make the mistake of trying to manage an overseas business relationship from afar. Without having a local presence, it's impossible to get a real taste for the local market and customs, and to build a strong relationship with the trading partner. Consider setting up an office (if the opportunity is big enough), appointing a local agent, or having someone visit regularly.
4. Keep an eye on breaking news events that could impact business. For example, the coronavirus global health crisis is affecting production in China, creating a standstill for weeks and causing massive disruption to global supply chains, logistics, and shipping. Be aware of how these types of events could affect your business, and your trading partner's business, and immediately begin looking for alternative sources of products or component parts.
5. Know where the product is in the supply chain. When a company sells to another trader and not the manufacturer, its end goal is more distant. From a risk management perspective, the farther up a company is in the supply chain, the less risky the business relationship.
6. Watch for signs that a trading partner is headed for financial difficulty. Paying late, pushing back for discounts or going MIA may indicate that a customer has hit some financial roadblocks. Stay clued in to these red flags so you can swiftly investigate the cause of the behavior change and make sure the customer can still make payments. Company leaders should also keep an ear to the ground, using their network to uncover any useful market intelligence on their customers.
7. Have an action plan for dealing with delinquent customers. First, establish the facts: Is the company truly in financial difficulty? Talk with the customer directly or engage a third-party expert to act as a go-between. If a company has a retention of title clause, goods can be recovered. If a customer refuses to communicate, the next step is to start the legal collection process.
Prepare for the Worst, Hope for the Best
Risk management for global business boils down to preparing for the worst but hoping for the best. It hinges on proper upfront legwork, such as getting contracts squared away. It also means thinking through every detail of the business relationship and staying aware of the market, the customer, and local customs.