To minimise the risks associated with exporting - or any form of business activity - you first need to identify them.
We are prepared to undertake an element of risk in everything we do, in both a personal and business sense. To protect us, we identify the risks and take steps to minimise them.
The same assessment is necessary when we are considering exporting our goods or services.
The risks inherent in exporting can vary depending on the commodity but the major risks are:
- Buyer risk - Will your purchaser be able to pay?
- Documentation risk - Can you meet the terms stated in the contract?
- Shipping risk - Can you get the goods there safely?
- Country risk - Is the destination country safe from political unrest?
- Bank risk - Are the banks involved in this transaction trustworthy and financially secure?
- Currency risk - What is the volatility of the currency like?
- More general risks related to general business - If I have to provide payment terms in order to compete in a particular market, will I be able to manage them with my cash flows?
Once all possible risks are identified, we need to analyse each risk in relation to our specific business and decide a strategy to minimise its impact or remove the risk altogether.
One of the most important institutions in mitigating the risks involved with exporting will be your bank. A bank that understands how you work with the trade cycle can not only help protect your business but also help you to optimise use of your capital and security.
Banks can use traditional payment tools like documentary letters of credit and documentary collections to help you maintain control of your goods. Documentary credits can also remove buyer risk, as the bank guarantees payment as long as you comply with all relevant terms and conditions.
Confirming the documentary credit with a bank in Australia will remove the country and bank risk from the transaction. This will ensure you get paid. Comply and get paid, or provide discrepant documents and put your payment at risk.
This brings us to the documentation risk - the risk that your documents contain discrepancies that may undermine compliance. Electronic documentation systems reduce keying and provide professional documentation, so are effective in reducing this risk. The best systems will be able to import information from documentary credits and complete your documentation with little input from yourselves.
A combination of credit insurance and documentary collections can also mitigate buyer risk and help control your goods at the same time.
Foreign exchange contracts and other mechanisms can be invoked to remove currency risk.
An insurance company can assist with the removal of shipping risk through the offering of marine or air insurance. Insurance companies can also assist in mitigating buyer risk by providing credit insurance.
One of the major factors that must be considered is the cash flow to ensure you can maintain your payments whilst providing terms that enable you to remain competitive in all markets.
Once again, your financial institution will be able to provide solutions through discounting of documentation, these days a preferred method to the use of expensive overdrafts. In addition, for your open account transactions, the use of export debtor finance can provide significant risk mitigation to protect your income and ensure cash flow is available when required.
Using a bank that specialises in international trade and can handle transactions at both ends can also assist in mitigating potential problems.
Discuss all options with your bank and concentrate on developing a risk mitigation strategy that works best for your business. Reducing your risk helps to ensure your export transactions are managed effortlessly and effectively, providing you with peace of mind and your business with the opportunities to grow.