For more than a decade, businesses across the world have been benefitting from “hyper-globalization” — the convergence of trade and culture across many nations — to deliver improved and more affordable products to their customer base and grow their market.
This technologically driven shrinking of the globe has been a tremendous boon to the economy throughout the recession, and it’s a trend that is not likely to reverse any time soon. It has also been a great equalizer. Today, businesses of any size in any location can be international players. For local businesses, this is great news. International trade can help bolster your firm’s financial health by extending your reach and increasing profitability — provided that you can successfully navigate the complexities of trade agreements, foreign exchange, and compliance.
The good news is this. When it comes to becoming an international player, you don’t have to go about it alone. Government agencies — from the U.S. Small Business Administration to the U.S. Trade Information Center — can work with you to find trade partners, share marketing expertise, offer technical assistance, and provide counseling. Banks can assist you with working capital, loan guarantees, collection, and currency management. The goal is to open the door to all the opportunities offered by international trade, while keeping the risk as low as possible.
More specifically, banks figure prominently in international trade because competing in the global market requires international expertise. Exchange rates between currencies shift continually, but that need not threaten your overseas sales. Using forward contracts, a bank can lock in an agreed-upon rate for future delivery of your products, reducing your risk from currency fluctuation. For example, if you’re selling in Mexico and the peso rises in value against the dollar, or you’re selling in Canada and its dollar (often called the loonie) rises against our dollar, you’ll still receive the payment you expected for your product.
A letter of credit specifies all documents required for the transaction and outlines the responsibilities of both the buyer and the seller. It’s a great way to protect your business by structuring transactions. For instance, if you need to import a part from Germany to manufacture your product, your bank could issue a letter of credit to the exporter in Germany, guaranteeing to pay the exporter through its German bank if the exporter fulfills the terms and conditions of the letter of credit. This protects the exporter by ensuring your payment. But if the exporter fails to deliver on time, then the exporter forfeits the guarantee of payment, which protects you, the importer, while still giving you the opportunity to accept late delivery and renegotiate more favorable terms for future deals.
Documentary collection transactions are between the buyer’s and seller’s banks. The seller sends the transaction documents to its own bank, and the seller’s bank sends the documents to the buyer’s bank. The buyer’s bank forwards the payment to the seller’s bank and delivers the transaction documents to the buyer.
However, if the buyer does not pay, the buyer’s bank sends the documents back to the seller’s bank, and the seller can go to the port in the buyer’s country and reclaim the goods. This protects your interest in the product. If the buyer cannot make payment, you retain rights to your product, because the buyer cannot claim the shipment of your product without the necessary documents.
Cash advance is another settlement method sometimes used in international trade. You generally want to avoid it when importing parts or products, in order to preserve working capital, but leverage it when exporting and working with a buyer with which you have never dealt. Your bank can also direct you to insurance brokers who can provide credit insurance to you, to cover the risk of nonpayment by your overseas buyer.
For advice and support services to help you sell your products abroad, consult a banker who deals regularly with foreign exchange and import-export financing. These experts collect valuable data for penetrating foreign markets or for shopping in them. They can advise you on country risk and buyer risk, providing trends on how long buyers in a particular country or industry might take to pay, or assessing the risk that a particular trading partner might not pay at all because of the local currency restrictions.
For importers, they can profile the risks of dealing with potential sellers overseas and provide expert assessments of foreign trade risks, which can help you price your products realistically — country by country and buyer to buyer. They can also guide you to the most appropriate risk-mitigation tools for your needs.
Some international banking services are relatively simple, such as establishing an account with your bank in the local currency of your trading partner. Other services are not so simple but can be a great aid. The SWIFT system, for example, speeds transactions electronically among banks that are part of global networks. This network allows banks like KeyBank to work with more than 700 trusted counterparty banks around the world. That’s why it’s so important to consult with the right team of advisers and to lean on the right resources when pursuing international trade opportunities. Through collaboration and trust, you can turn the complex world of global trade into a manageable and meaningful business opportunity.
Stephen D. (Steve) Fournier is president of KeyBank’s Central New York market. Contact him at (315) 470-5096 or email: Stephen_Fournier@keybank.com.