Finding a way to make global trade profitable is the end goal for any company seeking to expand further than they’ve ever expanded before. For this to happen, however, it’s important to understand the realities of the complications of global trade and how best to manage them.
Country risks include political problems, economic downturns, incompatible currency, fund transfer issues and other factors that deal with the stability of any one country. While not a huge concern for first world nations, it is a huge factor for businesses that seek to extend beyond the comfort of cultures they understand. Luckily, the answer to managing this is simple: insurance. In fact, there are numerous financial organizations across America, such as the Export-Import Bank, that are dedicated to providing enough financial protection of smaller companies to make foreign growth a potentially successful endeavor.
This is, by far, the biggest concern to all those looking to deal with other countries. Simply put, it is the chance that foreign buyers will either not pay or be late with payment. As it stands, the only way to compete competitively in a foreign market is by reducing this chance altogether so that there is a steady cash flow that then funds further improvements, such as dedicated import export software. With things as they are, though, there is a current hierarchy of payment methods based on the risk involved.
Cash-in-Advance is at the top of this list because it is the most secure. Exporters receive payment before delivering the goods. It’s the least attractive to importers since it’s a payment on good faith.
Letters of Credit involve banks promising exporters that payment will be made so long as all stipulations in the letter are met. While payment is assured, there is a bank service fee tacked on.
Documentary collections have banks on both sides handle the financial details with documents that verify payment will be made either immediately or at a future date. There is limited protection as these do not have any sort of verification process.
Open Accounts are the easiest and cheapest but pose the greatest threat. Goods are shipped prior to payment and money is not guaranteed.
Finally, the third complication with foreign trade takes its form in currency. As foreign governments can’t assure companies their money won’t devalue, it’s a huge risk that could result in major losses. This is why most businesses only work with US Dollars. That being said, as more and more countries are reaching a stable situation, they are demanding to pay with local currencies. Currently, the best way to hedge any loses in this arena revolve around setting a specific rate of currency exchange when the deal is made or at some point in the future.