There is a dark side to exporting, but it can be avoided

The desire to grow is probably high on every business owner’s agenda.

Some start out trading in their domestic market and then move on to explore overseas opportunities when circumstances permit, while others go global immediately.

But the trend is for an ever-increasing number of businesses to attempt to conquer international markets during the earlier stages of their growth. Our figures show that companies focusing the most on overseas markets are those operating in the transport and wholesale sectors. Currently, the main export markets for goods and services are Belgium (34.3%), Norway (15.2%), Sweden (9.2%), and Italy (8.1%).

And this is welcome. Domestic markets can be relatively small, and in the context of open economies, there are numerous opportunities to expand into overseas markets. With opportunities, however, come challenges. The good news is that these can be avoided with sufficient preparation.

When businesses expand their supply of goods and services, they can become highly dependent on a foreign market. This also means navigating new and unfamiliar business cultures, a different regulatory framework, distinct business processes, and varying rules for conducting business. In the early stages, every exporter will inevitably encounter these issues.

Working with small and medium-sized businesses from various sectors that have just started exporting, we often observe that being “burned” or facing other stressful situations could have been avoided if only the businesses concerned had done their homework beforehand.

Actions to take

First of all, a business needs not just to analyse the potential of a new market but also to become very familiar with its economic and geopolitical context. This involves careful analysis of target consumer groups and their consumption habits, as well as demand for goods, alongside an examination of the competition and the products they offer. The best approach to this is to visit the country, which will enable the company to assess the local market, business conditions, and regulatory framework more effectively, as well as provide an opportunity to meet potential business partners and clients. Sometimes, at least in the beginning, it may be worthwhile to sell goods abroad through an intermediary. Naturally, this will result in lower profits; however, the preparation process is more straightforward and can be completed in a shorter timeframe. Let’s not forget that it is also possible to learn a great deal from the intermediary you work with.

When processes have been properly arranged, the green light for exports can be given, and businesses can begin to focus on profits. But unfortunately, profits don’t come instantly. So here’s a piece of practical advice worth remembering – it is essential to consider, in advance, payment-related controls which, as real-life examples show, might be largely out of your control compared with what you are used to in your home country. It is crucial to sign contracts with new clients promptly and ensure that the terms of sale are clearly detailed. And it is best to ask for help from a legal counsel working in the target export market to draft such a contract.

Payment terms are also extremely important, and these should not present any risk to your business. To avoid missed payments, it is essential to check a client’s credit rating. Often, this part of the process is overlooked, but it is vital, particularly when a business operates in a less familiar overseas market. Our research shows that small and medium-sized enterprises considering opportunities for growth are more likely to prioritize security, which is why they often approach factoring companies before signing contracts with foreign clients. Factoring companies don’t just assess the credit risk associated with a particular client, but also ensure transactions against the risk of client insolvency. This signals that more and more small and medium-sized businesses understand that being brave, having the desire to grow, and seeking opportunities is not enough – they must also have reliable financial backing.

Factoring can help

This latter trend is also reflected in the numbers: according to our figures, export factoring has been steadily growing and currently accounts for almost half (approximately 47%) of our company’s total factoring portfolio. Credit insurance against client insolvency risk has contributed to this. In other words, in a case where a buyer becomes insolvent, a certain agreed-upon percentage of the money for the goods sold or services provided can still be reclaimed. In practice, this provision is particularly relevant for businesses that export to Eastern countries as well as businesses in the construction and road building sectors.

Furthermore, payment terms applied by foreign clients could act as a break for small and medium-sized businesses, as those payment terms can be significantly longer than those used in the domestic market. Understandably, long payment terms may deter businesses from entering overseas markets, as foreign expansion is challenging to achieve when cash is scarce. To prevent a situation where long payment terms disrupt your cash flow and deter businesses from exploring export opportunities, companies that require immediate funding utilize factoring (i.e., the payment of invoices already raised within a few days). Such conditions provide time, allowing a company to consolidate its position in the foreign market and build a customer base.

Therefore, the key ingredients for successful exporting are a careful analysis of the market and business environment you want to enter, consultation with local specialists, choosing reliable and accredited partners, carefully planning processes, and, most importantly, ensuring the right payment terms and conditions. These may be time-consuming, but they are critical for success. All of this might sound familiar to you, but practice shows that, at least in the real world, one of these important keys to success is often overlooked.

This article has been revised by

Edmundas Volskis

Chief Risk Officer

Edmundas Volkis is a vital member of the organization responsible for identifying, assessing, and mitigating risks that could impact the company’s goals. In 2015, he was the first employee at Factris, besides the managing director.
Edmundas previously worked in data analysis and business consulting. The CRO has a deep understanding of the organization’s business model, operations, risk appetite, and current and emerging risks that could impact the company.