Overcoming the barriers to foreign trade: top tips from RBS
As the British economy continues to emerge from recession, the appeal of overseas markets remains an attractive opportunity for UK businesses.
Organisations, now more than ever, are hoping to capitalise on the immense opportunity that expansion offers, especially given the appeal of emerging markets. Recent research* shows that over two thirds of businesses believe now is a good time to increase overseas trading. However, an equivalent number also believe that businesses will be put off exporting by the perceived complexity and risk.
It is true that as UK companies look to find new international markets for their products and services, they are confronted with the very real challenges that go hand-in-hand with overseas expansion. These challenges include managing cash flow, but also being aware of the risks. There is, however, much that can be done to manage those threats, and businesses should not fear the unknown as long as they are prepared and equipped with the proper tools and information.
Financial institutions and banks can be extremely helpful in providing trade solutions. The key is to manage your cash flow, lessen the risk by guaranteeing payments, and be smart and efficient with the management of your funds. Following such guidance will allow you to be more successful when trading overseas.
Whether you are an importer or an exporter, to find success, careful planning is of course essential. Here are our top tips for doing business abroad:
1. Know your overseas markets
Just as you would domestically, take the time to understand your potential overseas markets.
Is the product or service you offer relevant to a particular market, and what do you need to do to make it accessible to potential customers? A very simple example: most Chinese households own a rice cooker and most UK kitchens contain a potato masher, but not the other way round.
Once you decide your product is relevant, then it’s time to find out if it would need to be adapted for export and what regulations have to be complied with for each specific market. Identifying likely prospects as well as competitors will probably mean visiting each market. It is also crucial to understand all the risks involved, both political and financial. Individual country risk profiles are as diverse as their economies and, when developing a new business, it is important to be mindful of gaps in corporate governance, risks related to the lack of the rule of law, and incomplete institutions governing goods and capital markets.
Above all, remember you need to be confident of the demand for your goods. Understanding the potential for growth and being knowledgeable about the competition will help.
2. Develop your business plan
Expanding into new markets is a major undertaking, it is important to move at the right pace.
Don’t stretch yourself too thinly: concentrate your time, efforts and money into the one market you’re confident you can succeed in.
If you are an exporter, you can also often sell your goods to overseas markets in a number of different ways.
Particularly when starting out, it may be easier to look for a partner who already understands the market, rather than going it alone. For example:
• you can sell to a distributor who then sells your products locally
• you can use a sales agent who sells products on your behalf, or puts you in contact with potential customers on a commission basis
• you can enter into a joint venture with a local business
• if you want complete control over sales, you can set up your own local office.
3. Research all likely costs
Understand all the costs that you are likely to incur including shipping costs, banking costs and fluctuations in exchange rates (if applicable). Consider how customers will want to pay you, and what payment terms will be expected, and how that will affect your working capital and cash flow.
If you are an importer, it may be wise to also look into the following:
• Transportation costs
• Port/warehouse costs
• Import duties
• Inspection charges
• Agent’s fees.
4. Arrange for any financing requirements
Use this information to talk to your bank about how best to fund your business needs.
For exporters, receiving payment on open account (i.e. a simple payment against an invoice) at the end of the sale is the most usual way of doing business, especially in home markets. But it leaves the seller carrying credit risk on the transaction, as well as covering what may well be a protracted payment cycle while goods are shipped and received.
This is where trade finance can help. For example, an export Letter of Credit (L/C) will ensure your buyer’s bank guarantees that payment will be made, underpinning the transaction. It is also possible for your own bank to assume the payment risk by confirming the Letter of Credit with your customer’s bank. If financing is also required to fund manufacture or cover the shipping period, this may then be negotiated with your bank, based on the Letter of Credit.
Where documentary trade instruments such as L/Cs are used, efficient administration (preparation, collation and tracking) will help to reduce costs and minimise delays on both sides of the transaction. Your trade bank should be able to assist with document preparation and online management information systems.
A range of other trade finance instruments, including Documentary Collections, bonds and guarantees is available to support companies appropriately across the risk spectrum.
If open account trading is preferred, your bank will be able to advise on the best payment methods and account structures. In this case, export invoice discounting is another option to ensure funding is available when you need it to support your supply chain.
For companies looking to import, if your supplier wants payment or a percentage of payment before shipment of the goods, ask them to accept an Import Letter of Credit which can help to reduce your payment risk.
5. Think long term and build effective relationships
Developing a market won’t happen overnight, so it makes sense to invest time and care in building effective relationships. This approach will be appreciated and pay dividends in markets that place greater emphasis on relationships, such as those in Asia and certain emerging markets.
Once a relationship develops and a greater degree of trust exists between buying and selling parties, then the cost of doing business can also be reduced (for example, moving from L/Cs to Documentary Collections, which are a simpler and less expensive option).
Be sensitive to language and cultural differences in your target markets. What is considered good manners in the UK isn’t necessarily true overseas. You’ll also need to be ready to translate your packaging, instructions and manuals, and the costs of this also need to be factored in.
Make sure you understand the commercial imperatives your trading partners work under. Regularly liaise with your customers, agents or partners. Importers should look to build a strong, healthy relationship with suppliers’ key staff and management. Visiting your suppliers is often an essential part of assessing their suitability and building your relationship with them. If you are importing, you should also ensure that your supplier is able to supply your goods consistently, on a regular basis and to the required quality.
6. Finalise any paperwork
Be prepared for different documentary requirements. Different countries often require different types of documentations over and above the standard ones usually demanded.
Secure any export certificates and other documentation required as soon as possible.
Also, check the copyright on your products. Patents and trademarks are only recognised and protected in their country of origin, so you will need to secure additional protection in each you intend to export to.
Finally, ensure any goods imported comply with all government regulations of the destination country. Failure to do so can delay the custom’s clearing process and incur significant taxes.
*Research conducted by RBS in October 2010 among 518 UK companies