Chapter # 9 : Risks and Payments in International Business
Risk – Background
Risk is defined as a danger, peril or threat. You will encounter risks in any domestic or international business, but you know more about your domestic market than you do about foreign markets. Risk can range from a domestic upheaval, armed conflict in neighbouring countries, hefty fluctuations in currency, lost markets because of changes to trade regulations or simply because your client does not pay you the money they owe.
So what are the risks and how much risk can you tolerate? First of all, you should complete a risk analysis.
What happens if:
- The value of your currency or your buyer’s currency drops by 10%?
- If product sales go down by 15%?
- You don’t get paid what is owed to you?
- War erupts in the country you do business with or a country nearby?
- Your distributor goes bankrupt?
- You encounter production problems?
- There are technical problems?
- What if your sub-suppliers can’t deliver on time, with good quality?
- The competition tries to take over your market?
There are many factors to take into consideration and to make sure you protect yourself. You can secure payments in many different ways, but remember that a secure payment in one country is not so secure in another country. There are even risks of using some foreign banks. Many exporting countries can sell you insurance for non-payment. The cost depends on the client, the country and how much deductible you select.
Also, remember to study the Incoterm. That indicates the responsibility of you and the client when the responsibility is transferred between buyer and seller.
Remember that even though your product works on your domestic market, it does not mean it will work the same way on the foreign market.
When you do business internationally, you have to live with currency risks and therefore “insure” for currency fluctuations.
Summary – Risks and payments
- You will encounter more risks when conducting international business and they will be more difficult to handle than domestic risks.
- Make sure you understand what risks you can take and what their impact might be.
- Complete a risk analysis for each country. Given what you know about each country, what could happen and how can you prepare to deal with events? That will give you a good base if and when you are doing business there.
- Beware of political risks and know how to prevent losses.
- You have to decide when it is too risky to do business in a country or whether you can insure your goods and payments.
- Analyze the technical risks for each country. Look at the skill level, working environment and other aspects and make sure you use them appropriately.
- Assess bank risks. Is your foreign bank safe to deal with?
- Analyze currency risks and take steps to minimize them:
- Select a currency and how you can prevent losses, taking into consideration the market and client. (See Part Two of this chapter).
- Remember there may be a lack of currency in developing countries
- Open a foreign currency account if appropriate. (See Part Two of this chapter).
- Minimize document risks by ensuring that for each country and each product, the paperwork complies with local laws.
- Analyze the payment risks and select the right method for you and your client.
- Select payment terms based on the stability and sophistication of the market.
- Evaluate the client’s ability to pay and pay on time.
- Positive payment terms for you may be negative for your client.
- Payment terms have different security in different countries.
- Payment terms are a combination of safety and way of competing.
- Contact the bank and local companies to identify suitable methods of payment in that specific country.
- Insure the payment when possible, especially for large payments and if you are not sure of the creditworthiness of the client. (See more in Part Two)
- When insuring payment, allow for processing time for the insuring company.
- Analyze what can happen if interest rates rise and plan for how you can deal with the impact on cash flow. Arrange for financing to allow a positive cash flow.
Leif Holmvall, President
Export Pro Inc.
In our book “Export & Import – Winning in the Global Marketplace”
ISBN 978-0-9681148-1-0 those topics are covered in depth. You can also buy our book for less than $10 as an e-book visit e.g. https://www.amazon.com/dp/0968114814, where you can read part of the book.
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