India CSR Research Team
While exporting can offer abundant wealth opportunities to business, it is essential to pay heed towards obstacles as well which may arise during export.
Here, are some of the risks which exporters faced along with ways to overcome them:
Commercial or Credit Risk
When you export your goods or services, there are some concerns which may grab your attention, one being the creditworthiness of the foreign buyer. What if you don’t get a payment or what if the buyer turns insolvent? All such conditions can cause financial troubles to you. Therefore, to safeguard yourself from such events, it is essential to ensure the solvency of the client, with whom you are dealing with.
This behavioral aspect is necessary for the export business because it is not always feasible to get the financial information due to the local culture and practices. Further, the good financial statements do not guarantee that the buyer will also make your timely payment. Credit risk should necessarily be assessed as accurately as possible, and most importantly, it should be covered with proper tools, like trade credit insurance.
A trade credit insurance, also called, credit insurance, is a useful risk management tool which helps in covering the payment risks arise from the delivery of goods or services. As per this policy, the trade credit insurance company usually insures against a portfolio of buyers and pays a pre-decided percentage of an invoice or receivable to the seller, which may remain unpaid due to bankruptcy, insolvency or default. For instance, an Indian garment manufacturer sells apparels on credit to global clients.
It seeks coverage against payment delays and non-payment by its buyers. Here, trade credit insurance can help. In exchange for the premium, which would be decided on the basis of the annual turnover and credit risk of the buyer, the garment manufacturer would get protection up to an agreed percentage against any loss or damage which may arise due to late payment or the failure to make payment by buyers.
It involves risks of occurrence of political events, like a riot, war, social instability, etc.; in the buyer’s nation which may have its effect on the seller’s interest. Such types of events can hamper or cancel trade transactions and may also give rise to outstanding invoices. If any such event occurs, it may take a long time in improving the situation, and therefore, it is important to anticipate this risk in advance and cover it completely.
Currency Exchange Risk
When there is a difference in the currency of the seller, and the buyer, any change in currency exchange rate has its impact on both the parties. As a seller, you should make sure that your buyers make payment to you in your local currency via their bank accounts, and thus, ensure the healthy flow of cash between the companies to ensure smooth operations.
Language and Cultural Differences
When you enter a new market, you will also have to face a new culture. In fact, business culture can be different in different regions of the same country, so it is essential to have the local knowledge to build towards important working relationships.
Further, language is another important factor which can help you in building confidence and respect between different parties involving in business. If you have confidence in your local language, but you don’t have fluent writing skills, you can hire a translator for easing the work related to promotional material and business documentation.
It is essential to get clarity and avoid any embarrassing errors. Further, it is useful to associate local customs with your behavior as well. Your packaging or certain aspects related to your product may also require being changed or developed as per your new clients.
In addition to the above, it is crucial to understand which law applies to the sales contract i.e., the law of the country of the buyer or seller.
A thorough understanding of the risks prevalent in the exporting is necessary for the smooth functioning of your business. While having a comprehensive understanding of the buyer country’s rules & regulations is important, make sure that you also purchase trade credit insurance to get coverage against customer insolvency and financially secure your business.
(Photo Credit: http://businesskorea.co.kr)