There is a dark side to exporting, but it can be avoidedGo to the news page
Brian Reaves, CEO of “Factris”
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 businesses that focus on overseas markets the most 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 rather small, and in the context of open economies, there are plenty of 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 the supply of their goods and services, they can become highly dependent upon a foreign market. This also means trying to deal with new and unfamiliar business culture, a different regulatory framework, different business processes and different rules for doing business. In the early stages, every exporter will inevitably have to deal with these things.
Working with small and medium businesses from a variety of sectors that have just started exporting, we often observe that being “burned” or 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 become very familiar with its economic and geopolitical context. This means careful analysis of target consumer groups and consumption habits and demand for goods as well as analysing the competition and the products they offer. The best way to go about this is to actually visit the country – this will allow the company to assess the local market, business conditions, and regulatory framework more effectively as well as give it the opportunity to meet potential business partners and clients. Sometimes, at least in the beginning, it may be worth selling goods abroad through an intermediary. Naturally, this will result in lower profits, but the process of preparation is more straightforward and can be done in a shorter timeframe. Let’s not forget that it is also possible to learn quite a bit from the intermediary you work with.
When processes have been properly arranged, the green light for exports to start can be given, and businesses can begin to think about 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 early and to make sure that the terms of sale are 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. In order to avoid missed payments, it is essential to check a client’s credit rating. A lot of the time this part of the process gets forgotten, but it is vital, in particular when a business is operating in a less familiar overseas market. Our practice shows that small and medium businesses thinking about opportunities for growth are more likely to value security, and that 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 insure 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 looking for those opportunities is not enough – they must also have reliable financial backing.
Factoring can help
This latter trend is reflected in numbers as well: according to our figures, exports factoring has been steadily growing and currently accounts for almost half (around 47%) of the total factoring portfolio of our company. Credit insurance against client insolvency risk has contributed to this. In other words, in a case when a buyer becomes insolvent, a certain agreed percentage of 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 might deter businesses from entering overseas markets because foreign expansion is difficult to achieve if you are strapped for cash. To prevent a situation where long payment terms wreak havoc with your cash flow and put businesses off exploiting export opportunities, companies which need money here and now make use of factoring (i.e. the payment of invoices already raised after a few days). Such conditions provide time and allow a company to consolidate its position in the foreign market as well as 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 are critical for success. All of this might sound familiar to you, but practice shows that in out in the real world, at least one of these important keys to success is very often overlooked.
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Factris and NN Investment Partners agree on European financing agreement
Factris has closed a new EUR 50m secured financing agreement with asset manager NN Investment Partners (NN IP). The facility will be used to provide financing to European SMEs via the purchase of their trade-related invoices.
What is factoring?
Alternative forms of financing, like factoring, have never been more important for your business. Learn how factoring works for your SME. Factoring (or invoice financing as it’s also known) is well known to many businesses.