Financial Considerations with International Trade

Trading internationally is undoubtedly a hugely positive step for many businesses. However, if you’re taking your business global, you have to ensure that you know the fiscal risks associated with it.


There are always risks with taking your business global, and this is why you should draw up a detailed export strategy before you begin exporting. This should include information that you can use to guide your trading decisions and choice of business partners, including:

 

  • Basic credit checks on your new potential customer bases
  • Issues that may prevent you doing business in a certain country
  • Problems that may stop you from being paid


You have to think incredibly carefully about logistics, the impact of exchange rates, the shifting demographic of your customer base and the rules and regulations about trading with that country. If you don’t, you could be slapped with a heavy fine. In this post, we take a look at the fiscal considerations you need to make before you start trading internationally.


Exchanging to Foreign Currency

Exchange rates can greatly affect your business, particularly if you’re arranging, constructing and executing a large order over a number of days and weeks. This is because it’s possible that, between arranging a trade and settling payment, the exchange rate may change, leaving you out of pocket.


Of course, a moving exchange rate can move in your advantage too, but you should be aware that it’s a gamble you’re taking if you’re trading with a business in a country where sterling isn’t the dominant currency.


To attempt to minimise this risk, you should always quote your orders to customers and businesses in other countries in pounds sterling. In doing this, you’re essentially transferring the risk to your customer. However, in doing so, you may be disadvantaging yourself against your competitors who are willing to quote in the local currency, so ensure that you know the market before you make a finite decision.

 

If you decide to quote in the local currency rather than sterling, you can also enter a contract with your bank which fixes the amount of sterling you’ll receive if payment is made in a foreign currency. This is known as a Forward Exchange Contract and minimises your risk without passing the risk onto your customers.


Research the Country and Decide your Risk Level

As you’d expect, each country has a different level of risk associated with it. Speaking generally, the majority of EU countries carry minimal risks for trade. The UK also has a number of other trading agreements with a majority of nations, particularly America and Australia, among others.
Remember, however, that local events and political situations can make a market perilous for international trade, so be aware of the following factors that could all affect your trade:

  • Political events (such as elections) and economic measures that could affect payment
  • Instability in the region, such as wars, civil unrest or even natural disasters
  • Instability in a country or region’s economic outlook or banking system


Foreign exchange controls, or any trading agreements, that might affect payment of funds or cause the goods you’re sending to be impounded.


Once you’ve done your research on this, you’ll be able to decide the level of risk associated with trading with a specific country.


Approach Customers with Care

Before you deal with a new customer, do your research to minimise your risk. Always ensure that your customers are a properly solvent business before you begin to send them products and invoice them.


Do your research on the company, and do your best to establish whether they have a trading history and own their own premises. Of course, some countries are higher risk than others, but you should always perform credit checks to give you peace of mind. You should also ensure that you’re properly insured to guard against non-payment for goods.


To conclude, trading internationally is undoubtedly a positive step for many businesses. However, before you begin trading, it’s important that you understand the associated risks. Ensure that you prepare properly before you begin trading and you’ll be able to safeguard yourself properly.