4 risks of doing business internationally — and ways to address them
With one of the 10 largest economies in the world, California exported more than $174 billion in goods and services in 2014. Its top trading partners include our neighbors to the south and north - Mexico and Canada - but California is also the top state in the nation in exports to Asia, particularly China, Japan and South Korea. Although a smaller market, European Union countries purchased about 17 percent of all Golden State exports.
Clearly, doing business internationally may present significant opportunities for your company. But it's not without risk. Here are some potential pitfalls and how to manage them.
1. Currency fluctuations. For most U.S. businesses dealing abroad, currency volatility may pose the greatest risk. Foreign currency values in relation to the U.S. dollar may easily shift up or down between the time you place or fill an order and the time you are paying or being paid.
Analyze the potential impact on your business's income should the dollar rise or drop relative to the currency of the country you're dealing with. How much money is at stake? What's the timeline between the order and payment (the longer the period, the greater the risk)? What's the financial impact if the currency moves up or down 10 percent? 20 percent? If the monetary risk is significant, explore ways to manage the risk, such as hedging strategies.
Certain hedging strategies can help reduce or minimize the impact of volatility. Some hedges lock in an exchange rate at the current value to be used at a specific date or time frame in the future. This strategy takes an unknown - what the currency will be worth in the future - and turns it into a known. That helps protect you from downside risk and makes it easier to forecast your payments and profit.
2. Communication challenges. Language barriers, as well as local culture, may be barriers to successful international commerce. It helps to have a trusted resource within your company who is fluent in the language and knowledgeable about the culture of the country you're dealing with. In some cultures, showing up may go a long way to advancing your business interests. Although it's common in the U.S. to conduct business with people you've never met (and perhaps never even spoken with, given the prevalence of email), face-to-face meetings are still valued in some parts of the world and may help build trust.
In addition to these personal communication methods, make sure you have formal purchase, sales and service agreements in writing. Using standby, import and export letters of credit can help clarify expectations about payment and delivery.
3. Compliance. International laws and practices regarding trade, customs, accounting rules and tariffs differ, and you'll want to make sure you are aware of any that will affect your business interests. Some information resources include the U.S. Department of State, U.S. Department of Commerce and the U.S. Export Assistance Centers of California.
4. Political upheaval. Working with developed countries, your potential exposure to political upheaval may be low. With smaller and emerging economies, you may face a higher risk of government overthrow, monetary crises and default. Although there is little you can do to control those risks, you can take steps to ensure you are not overly exposed to them. Be wary of significant trading with a country that has a shaky economy, volatile political climate or limited infrastructure. Have an alternative plan to protect your people and business interests should your overseas market disappear or suppliers fail to deliver.
Be ready when opportunity strikes
Whether you are already exporting or importing or deciding whether to expand internationally, we have the financial experience, tools and resources to help you succeed.