Choosing the Right Overseas Business Partners
For many firms new to foreign trade, it can be a steep and difficult learning curve – especially if they are trading on credit terms.
While the potential for bad debts or late payment is a reality of business life, there are supports out there to help mitigate the risks, writes Dean O’Brien from Euler Hermes Ireland.
Foreign trade has always been a cornerstone of the Irish economy, and with economic growth making Ireland the poster child for post-recession reform and progress, renewed business confidence means the number of firms exporting is on the rise.
Recent figures from the Central Statistics Office highlights that Ireland’s export trade hit an all-time high in April. Trading overseas brings many great opportunities to grow the business and profits, but exporting does not come without risk. Of the €15 billion trade insurance cover Euler Hermes Ireland has in place, two thirds of claims come from exports.
Keeping the following four factors front of mind will help pave the way to profitable long term overseas business partnerships:
1. Get the basics right
While many business owners have fantastic services to sell and have researched their products, markets and competitors, it’s surprising how many of them have almost no information about their potential overseas customers when they sign a contract and open credit lines to deliver goods and services.
Doing your homework will help guard against future problems. Find out as much as you can about the firms you are planning to do business with. In many markets the key financial and trading information is readily available through sources easily accessible to the public.
Building a profile of your potential new customer will ensure you make a more informed decision when offering credit terms. Your research should focus on:
- Building a profile of the partner’s country risk
- The sector risks
- The financial health of the company itself and its key customers.
In short, keep asking questions until you get the answers you need.
2. Geo-political and economic risks
Political issues can have a significant impact on business, with changes to the landscape often severely disrupting, or even preventing the completion of export contracts. The Ukrainian crisis prompted a number of countries/regions, including the USA, UK and EU, to apply sanctions against individuals, businesses and officials from Russia and Ukraine. In return, Russia imposed reciprocal sanctions and import embargos which, from our own experience, had an impact on Irish food exporters.
Another looming political risk is the potential “Brexit”. The impact of United Kingdom’s exit from the EU would have both positive and negative effects on Ireland. In the short term, there will be painful supply chain dislocation as the two close trading partners adjust to the UK’s non-EU status and Ireland finds new markets. The longer term gain could include Ireland attracting significant investment flows from the UK, notably in the financial, chemicals and pharmaceutical sectors.
Economic trends such as growth, debt levels, bank lending, payment trends and insolvencies are important to give a solid idea of the risk levels within a specific market and the potential for payment disruptions. Despite a strengthening economy at home, seven out of 10 export markets still have insolvency rates higher than pre-crisis levels, posing a potential risk to those looking to expand overseas.
3. The legal and business environment
A key area many businesses forget to consider when looking at new markets is whether it’s difficult to actually do business there.
- How different are the licensing laws/distribution agreements?
- How do quality regulations differ?
- What new procedures and costs are associated with ensuring your product or service is ready for market?
- How long will it take?
Answers to these simple questions should be assessed before any contracts are signed.
It is essential to take into account the major differences in law across different markets, and a good understanding is required of how this could affect certain products and services, payment or the recovery of overdue payment. Always seek advice.
4. Assessing the information
Credit insurers can help firms looking to expand into new markets, assess the risk and minimise potential problems. Euler Hermes can assist companies in making their assessment using:
- Extensive global economic and country risk reports
- A 10-point risk grading system to grade potential buyers, helping firms build a profile of potential business partners.
Armed with this type of information, exporters can make more informed decisions about where and whom to trade with. Having a credit insurer to help manage and mitigate risks has many other useful benefits. It can provide reassurance to credit suppliers and your banking partners, create more headroom for working capital, offer more competitive credit terms overseas and enhance the quality of in-house credit management.
When it comes to contract decisions, keeping a close eye on potential export markets, sectors and companies can be daunting. However, by putting the appropriate measures in place, you can significantly reduce the level of risk and be in a good position to build long term profitable overseas business partnerships.
Written by: Dean O’Brien, Country Manager, Euler Hermes – the world’s leading provider of credit insurance services, helping customers around the globe trade wisely, manage risks and develop their business safely.
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