Expanding your business to international markets may definitely entail more opportunities, but it also implies greater risks. We help you identify the most common potential risks associated with foreign trade and provide tips to mitigate them better.
1. Country Risks
The political stability of your destination market is of utmost concern, since rules and policies in some countries can change overnight. Political or social conflicts could cause your client to default on payment and could also cause your products to be delayed, destroyed, or lost. Strikes or other social unrest affecting ports, shipping lines, or airports could prevent your products from reaching the target customer. Unsought legislative or administrative changes could also result in the sudden seizure or rejection of your products.
To cope with country-related risks, it is crucial that you keep yourself informed and updated with the economic and political situation of that market, namely when it comes to its trade, customs, and exchange policies.
2. Financial Risks
Financial risks can severely affect your cash flow as well as reduce and/or cancel your anticipated revenues. These risks can be related to exchange rate fluctuations or to payment defaults.
Exchange rate risks
Exchange rate risks can occur because of fluctuations in the value of a currency.
Unfortunately, many exporters have had their profit margins eroded or have incurred costs due to exchange rate fluctuations.
There are a number of ways in which you can protect yourself against this risk, including quoting your prices in a specific selected currency. The latter decision may adversely affect your relationship with your customers and in turn future sales and growth. Another alternative is developing a hedging strategy against currency fluctuations
Default & payment delays risks
The risk of not being paid for your goods or services is a very serious one for exporters, regardless of the country you are trading with. In order to mitigate this risk, the payment option you choose should match the level of the risk.
When you are a beginner exporter or starting a new business relation with a potential buyer, it is advised to opt for payment methods which provide you with high security, such as pre-payment prior to shipment or an Irrevocable Letter of Credit. There are a number of practices you can adopt to tighten your processes and in turn lower the risk of non-payment. For example, be careful about offering credit terms to customers and look into getting credit insurance.
Perform credit-checks on your customers: Make sure that you get regular credit reports on your customers. These reports are usually made available by credit agencies, insurers, or banks.
Take out credit insurance: Credit insurance offers protection against a broad range of commercial and country risks for exporters selling their products on credit. Credit insurance information is usually supplemented by extensive support services including access to commercial and political information from overseas credit rating agencies and embassies.
3. Logistics Risks
Many things can happen to your products from the moment they leave your possession until they reach your target export market. The most common logistical risks are loss or damage of goods during transit, or rejection upon customs clearance at the destination. Logistical risks can thus threaten your financial soundness if you fail to thoroughly plan and prepare the shipment of your goods in advance.
There are several measures or mitigation steps that you can undertake to help you can reduce your logistics risks:
Establishing clear and thorough communication with your client and choosing a proper logistics operator.
Specifying all legal clauses to avoid dispute, whether with client or freight forwarder.
Adopting operational safeguards and adequate practices such as proper packaging, good labelling, etc.
Adopting a financial mitigation process through proper insurance.
It is important to note here that there are no unified fixed fees for marine insurance, which cover cargo losses between different points of origin and their final destination. Therefore, it is expected that fees may vary between insurance companies. For that end, sellers are often obliged to pay Cost, insurance, and freight (CIF) expenses which are fees paid by a seller to cover the costs, insurance, and freight of a buyer's order while it is in transit. Until the goods are fully loaded onto a transport ship, the exporter bears the costs of any loss or damage to the goods. Once the freight loads, the buyer becomes responsible for all other costs.
4. Legal Risks
In addition to the legal aspects developed in the first section, it is essential to be acquainted with a basic knowledge of the most common risks which may arise after you embark on your export journey.
Intellectual property rights infringement
When you export from Lebanon, you don’t get the protection granted by your IP rights and trademark registration in Lebanon. In a foreign country, these protections may mean little, if anything. In most countries, protection is only obtained by registering these rights and trademarks with the proper authority in that country.
With that being said, you will need to protect your copy rights in countries in which you plan to do business and renew it after it expires or whenever you make a substantive change to your invention, logo, or content during the development cycle. This strategy helps you obtain the broadest possible protection.
Moreover, there are several law firms in Lebanon that specialize in foreign IP protection and registration. It is worth noting that the only multinational intellectual property right protection is done through the WIPO.
International Dispute Resolution
Nowadays, arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions (International Commercial Arbitration). International arbitration is the process of resolving disputes between or among transnational parties through the use of one or more arbitrators rather than through the courts. Arbitration requires the agreement of both you and your trade partner through a specific binding arbitration clause usually stipulated in the trade contract or business agreement. Consequently, the lawyer you designate to assist you throughout your journey can provide guidance on either the clause drafting or the arbitration process itself. In Lebanon, the Chamber of Commerce, Industry, and Agriculture of Beirut and Mount Lebanon have established the Lebanese Arbitration and Mediation Center that provides administration and monitoring services for arbitration and mediation proceedings in Lebanon.
5. Risks from Unforeseen Circumstances
Unforeseen circumstance risks usually include natural disasters, accidents, national disease emergencies, theft, and other force-majeure events. While they do not occur often, it is merely impossible to steer clear of them altogether. You can, however adopt some mitigation measures in order to alleviate their consequences. The financial impact of such risks can for instance be countered by opting for proper insurance coverage.
Contracts ratified between you and your client can also stipulate how you and your client should respond and bear the consequences in event of such force-majeure circumstances.
How do you manage these risks?
You can manage the risks yourself or employ the services of a comprehensive credit management and insurance provider. If you decide to do the job ‘in house’, you will have to consider the financial and other impacts on your business. Remember to include the costs of risk management and extending credit terms in your export quotes. When managing the risks yourself, you must have the resources and knowledge to:
Research the country and associated risks.
Gather credit and other trade information about existing and potential customers.
Insist on the use of a Letter of Credit when starting new partnerships.
Understand the terms of delivery and terms of payment which you can negotiate.
Make use of a contract or distribution agreement to govern the transactions, where you understand the implications in case of a dispute, and through which you can minimize risks associated with disputes.
Examine the need for credit insurance, identify the most appropriate policy, and investigate competitive products and services. Also, manage the credit insurance policy and maximize any benefits.
Hedge against currency risks.
If you need help with assessing the creditworthiness of your customers, search for reputable international credit rating agencies such as Dunn and Bradstreet and Graydon.