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The benefits and risks of international trade

What are the benefits and pitfalls of trading abroad, and how can the risks be managed?

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Exports in the UK are growing. The major catalyst was sterling’s weakness which meant that the demand for UK goods and services expanded greatly. What is interesting though, is the benefits are not just price driven. Earlier this year, we attended “International Giftware” which fills all 20 halls at the NEC Exhibition Centre just outside of Birmingham. We found international buyers purchasing UK goods because of the quality and innovation as well as the price. We then decided to talk to our clients about the benefits and the risks of trading internationally and the key points they highlighted are discussed below:

Top five benefits:

1 Grow your business
When trading internationally the “universe” of potential clients and suppliers will increase significantly. Just imagine increasing the number of potential clients by 100 percent each time you start selling in a new country. In all likelihood, this will probably be much easier than trying to expand your market place in your “home” country.

2 Diversify risk
The idea that a business relies solely on one market and directs all its resources into a single currency may prove to be more risky than it may first seem. Just look at the number of unprecedented global “disasters” (financial meltdown, earthquakes and unrest in the Middle East) over the last few years and the drastic impacts these have had on markets. Your home market could contract or even disappear, but your business may be saved by the revenue it generates overseas.

3 Better margins
As well as seeing increased sales, you may well enjoy better margins. Sterling which is currently weak may give you a head start when exporting. Pricing pressure could be less and it could also reduce seasonal market fluctuations.

4 Earlier payments
When working with companies overseas, both you and your customer will want to execute the transaction in the safest and most efficient manner possible. One of the many advantages when trading internationally is that overseas payers often pay upfront. This reduces payment risk and may well help your working capital.

5 Less competition
The ability to stand out amongst competitors is a crucial factor in business. When there are fewer competitors, this task is made easier. Your business, which may be viewed as comparable to others in the UK, may, when placed in a larger and more diverse environment, turn out to be a unique product or service not to be missed. By making the product or service available to worldwide buyers, you instantly create another life line for the business by being in less competition and increasing the possibility of standing out. This will in turn boost sales potential and allow your business to flourish.

The top five risks:

1 Not spending enough time defining the risks of international trade
Are you clear why you want to trade internationally? Are you aware of its risks? What are the reasons you want to sell or buy from overseas? It is crucial that you have a clear understanding of what international trade involves. It is easy to become engulfed in the excitement of its benefits and marginalise the risks to your detriment.

2 Misunderstanding the local legal framework
It is dangerous to assume that laws in other countries are similar to that of the UK. The reality is laws differ in every country which means it is essential you spend sufficient time educating your company about the legal framework of the country you are doing business with. Identifying a local lawyer is a good idea so that you can get a full picture of the laws that will apply and which ones will affect your business. Doing something legally right the first time can save you a lot of time, money and possible future heartache.

3 Not communicating effectively with your business partners
Relationships have to be worked at as there are always problems and emails can be very easily misunderstood. Time spent on the telephone and visiting will make life so much easier in the long term as you are likely to develop a rapport and gain a firmer understanding of how your partner works and thinks. Invaluable.

4 Not spending enough time with your potential business partners
Long distant relationships leave a lot to be desired. Two good friends of mine who have been buying goods from China and selling to a number of countries for more years than any of us wish to remember, spend even now, a huge amount of time up front with new potential partners. This is time very well spent as it has meant they have developed some very good partners and avoided some very dodgy characters along the way.

5 Unstable profits
With so many aspects to consider when trading at an international level, it is easy to leave currency exchange to the last minute. Unfortunately, in doing this, there is a risk of not getting the best exchange rate which in turn could have a negative impact on your business’ profit. As we live in the UK, anything we export or import will have to be exchanged into sterling. This means that between setting your budget, buying the goods and then paying for them, if you do not plan ahead, the market’s volatility could always change the worth of the sterling – and not always for the best.

Many of my clients’ international trade has brought them huge benefits but not without additional risk. International trade has to be approached sensibly and with a clear thought process so as to maximise the benefits and minimise the risks.

Charles Purdy is a Director at Smart Currency Exchange, For further information, go to www.SmartCurrencyBusiness.com or call: 0207 898 0500.

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