If you’re a small to mid-sized business (SMB), it’s a great time to think about doing business internationally. Recent advances in technology have given SMBs access to the same powerful tools that were previously available only to larger corporations.
While it’s easier than ever to export goods, you’ll want to make sure you avoid some common pitfalls.
Don’t Forget the Global Plan of Entry
Before entering foreign markets, you’ll want to establish a global plan of entry. This well-laid out strategy should cover where you will market your goods or services and how you will get paid.
It should also identify the risks you will encounter and strategies to mitigate their impacts.
To do this, businesses typically meet with their accountant, attorney and banker, but too often, these meetings happen in isolation, resulting in a lot of back and forth as various risks are uncovered.
For example, a business owner may lay out their tax strategy with their accountant before meeting with their attorney. The attorney then identifies risks from a legal standpoint that are at odds with the recently established tax plan. As a business owner, you then must go back to your accountant and revise the strategy.
To avoid this, it is advisable to bring all stakeholders together to lay out your plan of entry. This approach enables you to identify the risks you will face, particularly when it comes to setting up payment terms and receiving payments, and how you will mitigate them.
Make Sure You Select the Right Payment Terms
If you’ve decided to take your business global, it’s likely because you’re ready to grow, and markets outside of the U.S. offer a promising opportunity. However, to see success, you’ll need to set up the right payment terms.
Setting up payment terms for foreign trade can be complicated. You will need to determine whether you will require payment up front or if you can offer payment terms or find middle ground with your buyer by selling on a letter of credit or documentary collection.
Sixty-six percent of U.S. SMBs report requiring full payment in advance of shipment.[i] However, open account terms are quite common abroad and may be necessary to remain competitive in your chosen market.
Offering open account terms exposes you to more risk, so meeting with all stakeholders to establish your global plan of entry will help you to determine the right payment terms for your organization and how you will help protect your business.
Don’t Lose Out—Make Sure You Can Get Paid
When dealing in foreign markets, it’s important to understand that receiving payment for goods can be more complex than receiving funds from domestic buyers. For instance; checks written in foreign denominations, as well as foreign currency or foreign exchange (FX) transfers, cannot be deposited directly into your USD account.
Since most U.S. banks can’t accept foreign currency directly, you’ll need to make sure your bank is part of a network of financial institutions that can exchange foreign currencies and deposit the USD into your account. These networks take time to establish and are not easy to set up, and many smaller banks use larger institutions’ networks, resulting in longer payment cycles and higher fees.
For example, when payments pass through banks without direct foreign exchange capabilities, payment instructions are not always clear as they might include multiple banks within the instructions. This can make the payment process confusing for foreign banks and opens you up to greater risk as a result of errors.
As you can imagine, passing payments through multiple institutions also increases the time it takes to receive payment as well as the amount of fees that are deducted from the transaction before funds are deposited into your account. Each financial institution that handles your payment will need to assess a charge to cover their costs, so the fees associated with passing your payments through multiple banks can add up quickly.
Society for Worldwide Interbank Financial Telecommunication (SWIFT)-member banks, on the other hand, can shorten the time it takes for you to receive payment and lower your costs. The SWIFT system is a network used by financial institutions to send and receive payment instructions and facilitate transactions though their global correspondent network.
When a bank is a member of SWIFT, they have an entry in the SWIFT directory that allows other banks to access clear and concise payment instructions. Since a SWIFT-enabled bank has direct connectivity to other financial institutions, fewer transactions are needed to transfer payments, resulting in quicker receipt of funds and fewer fees deducted.
For companies who are well-established in a foreign market, you may also want to consider setting up an account in the local currency or a multi-currency account (MCA). MCAs can allow for easier receipt of payment from your buyers while also giving you the opportunity to make payments in that same currency. This allows your company to net its payables and receivables to reduce your foreign exchange exposure. However, not all banks support MCAs due to their complex nature and increased fees, so selecting a financial institution that is knowledgeable in all payment channels can help you make the right decision.
Look for Experience
Considering that 95 percent of the world’s population is outside of the U.S., entering foreign markets allows you to sell your goods and services to an entirely new audience. The benefits can be tremendous, but the opportunity isn’t without risk.
You can greatly mitigate those risks and move more confidently and safely into foreign trade by facilitating open collaboration between your attorney, accountant, financial institution and your business.
Our Global Banking team uses a consultative approach to bring you simple, cost-effective solutions for navigating the global finance scene with confidence.
About the Author
Michael Salerno joined the bank in 2002 and currently leads the Global Banking team, which includes business development, international payments, foreign exchange risk management and trade finance solutions for corporate and correspondent banking customers. International issues can present challenges for organizations, and Michael enjoys creating simple and transparent solutions that reduce the complexity of doing business internationally.