Mitigating Payment and Foreign Exchange Risk When Selling Overseas
By Carla Winfield, Senior Trade Finance Advisor at Silicon Valley Bank
U.S. companies are increasingly looking to foreign markets for new sales opportunities, which can be challenging but rewarding if you are properly prepared for the risks involved. Understanding the risks associated with entering new markets and gaining the knowledge necessary to mitigate those risks can help you grow your business successfully overseas.
International Risk Factors
When negotiating the terms of a sales contract, it is vital to be aware of the international risk factors that may interfere with a foreign buyer's ability to pay its invoices. Once the international risk factors are assessed, it is important to determine how payment will be made under the sales agreement. The method of payment negotiated under the sales contract will indicate the degree of commercial or political risk exposure associated with the transaction. There are several questions that need to be answered before agreeing on a method of payment:
- What is your leverage with the buyer?
- Can your business afford the loss if the invoice is not paid?
- Will extending credit and the possibility of waiting several months for payment, still make the sale profitable?
- Can the sale only be made by extending credit?
- If the shipment is made and not accepted, can an alternate buyer be found?
Types of Risk
- Commercial Risk: The risk associated with the individual or institution responsible for payment.
- Political Risk: The risk of doing business in the buyer's country, such as political instability, changes in export-import laws or currency inconvertibility.
- Foreign Exchange Risk: The risk associated with the actual transaction, translation and economic exposure.
Want to learn more about what types of risk exist in and how to avoid them? Read the original post on SVB's blog.