1. Credit Risk Counterparty
or credit risk is the risk associated with not collecting an account
receivable. There are numerous ways in which businesses can guard themselves
against this risk while expanding to global markets.
(i) Take payment in full [or a
decent percentage of money upfront] Taking
100 percent of the amount owed, or a fair percentage, before rendering the
services at the time of the placement of an order can be used to cut down
administrative expenses and finance charges. This eliminates the risk of
non-payment. Although this may be difficult for new businesses and exporters,
it can be worked out with little negotiations.
(ii) Letter of credit -This refers to a commitment issued by a
financial institution wherein the institution agrees to pay a set amount to the
service/product provider in exchange for delivery within a set timeframe. This
offers protection to both the seller and the buyer. It includes a detailed
description of the shipment as well as the terms of sale.
2. Intellectual
Property Risk This
risk involves third parties making unauthorized use of the strategic
information of a business or property that affects the value of services or
products offered by a business, either directly or indirectly.
These
risks increase tenfold when doing business overseas because of the difficulties
that exist in defeating business rights remotely. This can be avoided
by registering the corporate names as well as the trademarks before
signing an agreement in any country.
3. Foreign
Exchange Risk -This
usually concerns the accounts payable and receivable for contracts that are, or
soon would be, in force. Foreign exchange rates are in flux constantly. Hence,
businesses would be forced to make conversions of the funds generated overseas
at rates lower than what is budgeted.
reason
why it is crucial for businesses to have an appropriate exchange policy in
place (i) Stabilizing profit margins over sales made (ii) Mitigating the negative impact of fluctuating
rates on sales and procurements (iii) Enhancing
cash flow control (iv) Simplifying domestic and foreign pricing
4. Ethics
Risks
It is
vital to maintain a high ethical standard when offering any product or service
in a global market. Companies may face certain questions pertaining to their
values at any point while doing international trade.
Social
conditions and customs vary from country to country, and hence, it is necessary
to be especially vigilant. You need to make sure that your foreign suppliers
and partners adhere to your values and rules regardless of where they operate
from.
5. Shipping
Risks
Whether
you are shipping goods abroad or locally, you may face issues such as
contamination, seizure, accident, vandalism, theft, loss, and breakage. Before
shipping any goods to the buyers, you need to make sure to have sufficient
insurance.
The International
Chamber of Commerce has laid down rules for each party involved in international
trade and their responsibilities with regard to shipping risk. It is best to go
through the rules and take necessary precautionary steps.
6. Country and Political Risks
These are risks such as non-tariff
trade barriers, central bank exchange regulations, or ban on the sale of
certain products in specific countries. For instance, several countries have
banned products obtained from threatened animal species.
There
would be certain things that would never be under your control, such as
sanctions, and you must be prepared in order to overcome them. You can find
more information on such restrictions by checking the official website of the
Ministry of Foreign Affairs and Trade for the specific country.
(i)Exchange Control Regulations - Several developing nations
operate certain exchange control regulations that are associated with the flow
of money from and to their country. You need to identify if these regulations
are effective in the country which you intend to trade with. This is because
these can delay your payments.
(ii) Prohibited Goods-You
need to make sure to carry out basic research on the import/export allowances
offered by the country you are interested to carry out your business in. There
are many products that are prohibited or restricted in some countries.
For
instance, what is acceptable in China may not be allowed in New Zealand. You
need to make sure to check out all the rules pertaining to your target market
in the country you are interested to carry out trade
with.
Whenever
you are exporting certain products, it is essential to get them verified so
that they meet the requirements of the country you would be exporting to. It is
mandatory to obtain an export certificate before you actually commence trading
globally.
Customs will
then verify the details associated with your export certificate. It is better
to be familiar with all the rules that you are governed with while trading
globally, rather than face hurdles at a later stage. This will help you operate
your business without any hassles once you have set your roots.
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