As they expand their trade horizons, the last thing ambitious business people want to do is lose money. With practical information to hand and due diligence in place, they can reduce the financial risks and ensure they get paid – or receive the services contracted for. Here are some aspects to consider and take guidance on from professionals.
The first essential is gathering sufficient knowledge about the identity and reputation of a prospective trading partner. All business relationships require mutual trust, and of course trust is harder to achieve when not establishing a trading relationship face-to-face but across barriers of distance, culture and language.
Whether buying or selling, it is important to conduct due diligence checks on any new overseas trading partner to verify their details and reputation. Industry and government bodies, the internet and international credit agencies could prove useful when assessing a prospective partner.
It is also a good idea to obtain documentary evidence that a prospective overseas buyer can pay – or, for importers, assurance of a supplier’s ability to deliver.
The risks of overseas trade are not just financial, but reputational too. Due diligence will also help avoid businesses becoming unwitting partners in criminal activity such as money laundering. If a deal looks too good to be true, asking more questions is a sensible precaution.
Businesses planning to trade overseas should carefully consider various payment options, and the levels of risk these expose them to in a particular situation. For example, running an open account is the least secure option for those exporting, but the most secure when importing. Advance payment is the most secure for vendors, but the least secure for buyers.
Other trading instruments such as letters of credit, import bills and credit insurance offer greater protection while trust develops. A letter of credit, or documentary credit, is the most secure method of payment other than payment in advance, and is often used for new customers or in high risk situations.
To avoid delays and additional costs, ensure that all documentation is well-prepared, complete, up-to-date and complies with local requirements.
When operating an overseas bank account, remain alert to fraud by reviewing transactions and balances regularly. And to prevent fraudsters impersonating real customers or suppliers, it is advisable to verify all change of details instructions by telephone.
Though there is a potential competitive advantage in offering to deal in the local currency of the target market, this does bring exposure to currency exchange fluctuations. A robust strategy might combine a number of currency options designed to help balance foreign exchange risk.
In summary, due diligence and sound practices are at the heart of any successful strategy for trading overseas. This way, risks to business finances and reputation are kept to a minimum when taking the next step in growing a business.
Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.