3 common risks to guard against when exporting
As far back as 20,000 years ago, early entrepreneurs overlooked the risks of exporting because they recognized the benefits of trading goods between regions.
Today, selling internationally still brings complex risks, but they’re still outweighed by the benefits of selling to new markets.
On average, Canadian companies that export show higher revenues and profits growth than non-exporters. Yet, only 10% of Canadian businesses with annual revenues under $100 million sell to countries outside of Canada, according to BDC research.
Common types of risks confronting exporters
One challenge to exporting is understanding how to deal with export risks. Identifying and guarding against these risks will go a long way to ensuring your exporting projects meet with success.
Here are the three main categories of risks facing exporters and how to manage these risks.
1. Economic and financial risks
Economic and financial risks are those that affect your cash flow, profits or company viability, for example:
- a customer who can’t or won’t pay
- broken contracts
- currency fluctuations
- a country that suffers an economic downturn
Some of these risks also exist when selling in the domestic market, but the risk increases when selling internationally. This can be due to a shaky economy, or higher levels of instability and corruption.
The risk when exporting is also higher because it’s harder to resolve issues in another country due to distance, different justice systems, language barriers and the like. This is problematic, because a single unpaid invoice can mean the difference between profit and loss.
How to avoid economic and financial risks?
Fortunately, there are many resources available to help mitigate these risks.
- Buy credit insurance to protect against a range of risks including customer bankruptcy or non-payment, contract cancellation, issues with currency conversion or transfer, and more.
- Diversify your export markets. If you export to 10 markets instead of one, you can shift your efforts to other markets when one goes through a downturn.
- Consult Export Development Canada’s (EDC) Country Risk Quarterly for information on risks in nearly 200 markets.
- Understand the types of foreign exchange risks that you may face in global markets and how to measure your exposure. Fluctuations in currency exchange rates can take a large bite out of your profits.
- Familiarize yourself with Incoterms, which are a set of formal terms with agreed upon meanings within the trade community. These will help you write better international contracts.
2. Social risks
Social risks are business activities that affect local and global communities such as offering a bribe or involvement in terrorist financing, labour and human rights issues, environmental degradation, or a lapse in cyber security.
On a business level, these offences could damage your company’s reputation, brand and credibility, hurt sales, and incur steep financial fines, not to mention the possibility of personal liability and penalties.
While you might never intentionally participate in such activities, your company is still at risk. Many businesses have become embroiled in corruption without even realizing it was happening.
Cybercrime is a relatively recent but rapidly growing risk, as witnessed by the many businesses that have fallen victim to leaks or viruses.
How to avoid social risks?
To help avoid social risks, ensure that you and your employees are well versed in spotting signs of potential corruption and terrorist financing and have a plan in place to deal with these risks.
3. Political risks
The global stage can be unpredictable at times. While political instability is more often associated with emerging markets, trade deal renegotiations in the U.S., and the U.K., show that political change can affect exports at any time.
The main types of political risks include:
Creeping or outright expropriation
Foreign governments can seize your investment or adopt measures that have the effect of expropriation.
Political violence risk can include terrorism, war, civil strife or other political events that can damage your assets or prevent you from conducting operations.
Conversion and transfer risks
This type of risk happens when a foreign government or central bank prevents you from converting local currency to hard currencies (i.e., U.S. dollars, Canadian dollars, euros or other safe-haven currencies), or from taking hard currency out of the country.
Repossession is when a foreign government prevents you from repossessing or re-exporting physical assets brought into the country (e.g., machinery, equipment, rolling stock, an aircraft, etc.).
Non-payment by a government
Governments will sometimes refuse to pay their suppliers, which can expose you to non-payment events.
How to avoid political risks?
While no one can accurately predict when and where political events may disrupt trade, buying political risk insurance can help protect your assets from a number of political risks.
This article was written by EDC for use and publication by BDC. For more information, visit EDC’s website at www.edc.ca.