For a small business to grow into a large enterprise, having a larger addressable market is key. For Australian businesses, that often means exporting, since the local marketplace is finite. However, many small businesses are wary of the risks involved in exporting and, often mistakenly, believe they don’t have the resources to manage risk and get the returns they need.
It makes sense to be cautious, especially if you’re new to exporting. However, if you’re aware of the risks involved and put measures in place to protect your business, exporting can be an effective and rewarding way to grow the business.
Political and regulatory systems at export destinations can dramatically affect the success or failure of the exporter. You can incur hefty costs if you aren’t aware of these systems and how to work within them. Plus, if a new government comes into power while you’re doing business in these locations, policies around exporting and importing can change, leaving Australian exporters high and dry.
The four main political risks to consider when exporting:
- Currency transfer risks: Governments as well as economic conditions can change while you are waiting for payment, which will affect your ability to repatriate your money from the country you have exported to.
- Delivery risks: Regulatory conditions can change, which will affect goods in transit immediately. Exporting regulations can also change quickly to reflect environmental requirements.
- Embargoes: A trade embargo against the country you export to or against your own country can bring your business to a standstill, with significant losses.
- Sanctions: When countries impose sanctions on each other, international trade flows are disrupted. This political risk is more common than you might think.
With these risks in mind, it makes sense to work with someone who knows the local markets, speaks the language, and can demonstrate a track record of helping Australian exporters kickstart their businesses in that location.
In the past, companies relied on letters of credit to do business across international borders. Today, creditworthy customers expect to do business with overseas suppliers through open account trading terms. This can streamline transactions but also leaves Australian exporters open to losses.
Another risk exporters face is that customers simply won’t pay. The danger of non-payment is real particularly in countries with fluctuating economies or civil unrest. Non-payment or late payment can have a serious impact on cash flow, making it difficult for the business to grow and, in some cases, to survive. Trade credit insurance can mitigate these risks but many businesses don’t understand the competitive edge it can deliver.
Credit insurance lets you reduce your vulnerability when dealing with customers in overseas markets that may pose an economic risk. However, while it’s common practice for exporters to insure their goods against loss or damage, many still consider credit insurance a non-essential investment.
There are five key reasons for this:
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Ignorance:
The Australian Trade Commission, Austrade, has issued warnings to exporters about the dangers of offering credit terms to buyers in some markets, but many organisations remain ignorant of these warnings. It’s important to keep up to date with the current international economic climate. A trade credit insurance provider can give you this information and help you understand the risks that face your business, and how to overcome them when you do offer credit terms.
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Underestimating risk:
Without sound knowledge of international markets and buyers, exporters can find themselves in trouble. It’s important to understand the real risks in the larger global market; your trade credit insurance provider can also assess your potential buyers’ ability to pay you, an essential due diligence process.
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Complacency:
Some business owners have been lucky; their customers usually pay on time. This leads to complacency and ignores the consequences of external forces that might interrupt cash flow further down the supply chain, leading to non-payment.
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Lack of awareness of real costs:
Trade credit insurance is less expensive than many other forms of insurance but many organisations avoid it because they believe it’s more expensive. However, the costs need to be weighed against the opportunity that credit insurance gives you to explore new markets as well as the impact a bad debt can have on a business.
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Incorrect advice:
It’s important to get insurance advice from different sources, educate yourself, and make a reasoned, balanced decision about the best solution for your business.
Having adequate trade credit insurance can give you the confidence and peace of mind you need to embark on a growth program through exports.
