Whether you are importing or exporting, the challenges of doing business internationally are many, and they are in constant change. What are the realities and risks to consider? Benoit Marcoux, Director of Derivatives, and Nicolas Dupuis, Senior Advisor, Businesses and Financial Institutions, both with National Bank’s International Products Group, share their views.
There are several categories of risk in international transactions, such as foreign exchange risks, delays or non-payment, quality-control and logistics issues, not to mention tax, customs and legal regulations, cultural realities and political situations. These issues are present whether you’re selling or buying.
The risks associated with currency fluctuation stem from the fact that a lot of time can go by from the signing of an agreement to the delivery and payment. This can adversely affect your financial forecast if, during this waiting period, the exchange rate fluctuates significantly. Even historically stable currencies can go through periods of volatility. “Too often, this risk is underestimated. We’ve noticed that many businesses are needlessly exposed to market volatility, and they fail to consider the potential consequences. A movement of just 10% on a currency, which is not at all uncommon in recent years, can completely erase expected profits,” warns Marcoux.
“Getting paid is one of our clients’ main concerns, and getting paid on time is another,” says Dupuis. “Some payment delays can have disastrous effects. The first step—and it’s a crucial one—is to contact your banker to establish a clear plan for the operational issues ahead. Our teams offer solutions that guarantee payments, for instance through invoice factoring, a strategy that covers potential payment delays or missing payments,” he explains. The company’s goal should be to focus its cash flow on value-added production activities rather than on weathering long delays in payment.
Other proven financial products, such as letters of guarantee, letters of credit and documentary collection, are also available. Although these tools have been around a long time, they are being modernized for the digital era with electronic delivery methods.
“Even though from a legal standpoint Europe and the United States have many similarities to Canada, that doesn’t necessarily mean that business will be easier to conduct there compared to elsewhere in the world. In many cases, free-trade agreements actually add certain complexities,” says Marcoux.
In this context, it is important for companies to have the right support. The team of legal, financial and accounting advisors generally grows in number when a company goes international.
“Some companies mistakenly believe that they merely need to reproduce their business model from one country to another to achieve the same success as in their home market. But be forewarned that international business can be full of surprises,” says Dupuis. “In Canada, we have a very North American approach: straight to the point, sometimes with a touch of humour. In other countries, particularly in Asia, business is conducted with greater decorum, while elsewhere, devoting a great deal of time to developing an agreement can lead to an eventual signing. For these reasons, it’s important to deepen your knowledge of the culture of the countries you want to do business with.”
“The geopolitical landscape has a direct influence on business transactions, and it can shift very quickly,” says Dupuis. “A country that was easily accessible can suddenly become very problematic. These changes can have a significant impact on exchange rates, interest rates or a company’s ability to meet payments,” he adds.
In addition to cultural considerations and geopolitical shifts, other political realities need to be considered. For instance, when it comes to customs or tariff policies, a country’s decision to subject your product to new protectionist measures can have an impact on your company’s competitiveness. To guard against these risks, knowledge and preparation are crucial.
A company’s leaders should always be up to date on issues associated with these risks. This underlines the importance of being well-supported. “Our teams of specialists constantly analyze the evolution of exchange rates,” says Marcoux. “The markets move so quickly; it’s very unwise to take this reality into account only at the end of the process. So, as soon as you enter into a new transaction, or sign a sales or purchase contract abroad, you should talk to your advisor about immediately adjusting your hedging portfolio – this will ensure optimal risk management.”
Both experts agree that business leaders should focus on what they do best, which is to look after their day-to-day operations and develop their markets, and turn to specialists for help when considering international business transactions.
Neglecting this aspect means taking significant risks that are actually completely avoidable. “It’s amazing to see that experienced management teams often overlook fundamental elements, such as dealing with exchange-rate fluctuation,” says Marcoux. “When it comes to a company’s future, the key to success in international transactions is planning and discipline,” he adds.