Know the Major Export Risks, Then Manage Them
November 29, 2017 8:24 PM
The number of small U.S. companies that export has skyrocketed in the last decade, making banks take note of a business line that had always been of marginal interest due to perceived risks.
In 2006 about 240,000 small companies, defined as less than 500 employees exported compared with nearly 300,000 in 2015, the last year for which data is available. The value of goods exports by these companies increased from $263 billion to $482 billion, according to the US Department of Commerce.
Risk of non-payment, loss or confiscation of goods, nationalization of assets and other disadvantages can be no greater than in a company’s home market, depending on the selection of the foreign market and the customers in that market. Today, information on all markets is more extensive, up to date and accurate than ever before, taking much of the guess work and associated risk out of the market selection process. Still, selling in any market is not without some risk, and there are some broad risk categories to consider in your export plan.
Failure to meet quality and quantity expectations. Make sure these expectations are understood by all parties up front. As the producer it’s your responsibility to ensure you have the capacity and capability to fill the order in the quantity and quality specified. Ship the goods on time, whether you or the buyer makes the arrangements. Failure to perform in any of these areas can lead to non-payment, penalties or a law suit, likely damaging your relationship with your banker.
Make sure you understand the government rules pertaining to the export of your product and exporting in general. Do you need a license to export your product? Most products don’t require one? Can you legally export your product to a specific country? Exports from the US to most countries don’t require a license. Are the buyers of your products under sanction by the US government? Few are, but it’s the exporter’s responsibility to check the lists of “denied parties.”
Currencies generally fluctuate within certain modest bands, contributing little risk to export transactions. But some countries occasionally experience sharp drops in their currencies value, which can lead to losses if you agreed to accept payment in the buyer’s currency which then loses a large portion of its value before you get paid.
Besides export licenses, what other documents are needed and will you assign responsibility for completing the documents to a reliable third party or will you complete them yourself? Common mistakes on the commercial invoice, such as using the wrong HS code or not including one at all, can delay customs clearance in the destination country, leading to late delivery.
A weakening economy in your target market can reduce demand and suppress prices. Demand may exist but sales will require deep discounting, which you may not be in a position to provide. If you need bank financing to extend terms to buyers, banks may be unwilling to provide the needed line of credit. The other side of the coin is that opportunities exist in the midst of risky situations. It depends on your tolerance, your relationship with your bank, and your ability to go at it alone if needed. Another associated risk is when governments clamp down on the use of foreign currencies, especially the US dollar, to pay for imported goods.
Unstable politics can sometimes raise business risk. Wars and major civil disturbances are obvious examples. Countries may also attempt to create barriers to exports in order to protect domestic producers or appease local interest groups. Other tactics involve testing and paperwork requirements that are burdensome for exporters and importers. But there are many country markets to choose from with favorable political conditions.
Political risk like the other risks have one thing in common: They are all manageable.
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