Three Risks for International Trade Companies and How to Manage Them
Entrepreneurs understand that running a business carries risks, so planning for risk is an essential skill for any new or established company. However, international trade companies have a unique set of potential financial hazards that that need to be managed in order to ensure steady cash flow and positive trade outcomes. Not being prepared for typical pitfalls could impede the growth and overall success for an import/export company.
Depending on the buyer’s country you’re trading with, there could also be political and legal issues that need to be mitigated against. But any global trade business needs to be prepared for these three main risks:
1. Currency Risks
Currency risk occurs for payables and receivables when foreign currency fluctuates. Currency volatility can have both positive and negative effects on a company’s bottom line. For exporters, if a product is sold in the local currency of the buyer and that currency decreases in value, it could have a negative net effect on sales numbers. Similarly for buyers, if your local currency loses value it could cost thousands of dollars when the time comes to pay invoices.
Typically, global trade companies are in the business of exporting and importing, not currency trading, so planning for currency fluctuation is the best way to manage potential losses over the long term. There are several methods available at varying costs that lock in trade rates to hedge against currency exposure. The last thing a trade business owner has time for is tracking currency rates daily and trying to manage them through their supply chain. Moselle’s platform can do a lot of the heavy lifting for companies by tracking rates and providing currency exchange predictions all in one dashboard.
2. Shipping: Duties, Tariffs and Freight
Depending on trade agreements, buyers may need to pay tariffs, similar to a sales tax, when they import a product into their country. Tariffs increase the cost for buyers so they affect the final cost of a product, which may make them less competitive than a company that sells a similar product locally. For exporters, tariffs and duties may make their product less attractive than one that can be purchased locally, so managing them is essential for maintaining healthy profit margins.
Most international trade companies use brokerages to manage duties and tariffs to get their shipments cleared at borders, but products can be held up at borders and costs can be unpredictable. Add in local freight charges and it can easily become impossible to handle constantly changing charges. Having a relationship with a local broker can head off potential headaches.
3. Credit Management Risks
Doing business with buyers often means extending some sort of credit throughout the relationship, based on trust and goodwill. In cases where buyers default on payments, sellers in the same jurisdiction have legal recourse that can help resolve non-payment issues. In an international trade scenario, however, it becomes more complicated to collect on defaulted invoices. Non-payment can interrupt cash flow and impede overall business operations and even access to credit.
Both buyers and sellers can mitigate these risks by having well-worded, comprehensive agreements that lay out delivery and payment schedules. New international clients should fill out credit applications and due diligence must be done by exporters to ensure that buyers can access credit from their banks and that they have good credit relationships with other suppliers. Once a relationship has been established, exporters might choose to extend further credit to importers so they can make larger purchases.
Keeping on top of the paperwork required to set up payment terms, track each buyer’s payment history and their outstanding invoices can be cumbersome and time consuming. Moselle platform users can easily track their buyers’ credit habits with their company, and get insights about outstanding receivables at a glance, without having to crunch numbers constantly. These crucial insights can also be used to predict cash flow and to access cash advances when needed.