We look at the key considerations of exporting, and how you can minimise the risks.
There are many benefits to exporting, increasing profitability through expansion, avoiding seasonality issues and stimulating fresh demand, but obviously when you decide to do business overseas you can face a degree of risk. And is your business one that will benefit from exporting its product anyway? We look at the key considerations of exporting, and how you can minimise the risks.
An increasing number of companies are beginning to export, often because of the increasing globalisation of markets, or new opportunities that the Internet has opened up. But there are other reasons why, as a business, you may want to consider exporting your goods and services:
- To increase your revenue and profitability by expanding your business.
- To shield you from fluctuations in your domestic market. A downturn in one country’s or even continent's economy isn’t always repeated worldwide. And the more dispersed your customer base is, the better.
- To smooth out your annual workflow. Businesses that focus in one product area may experience seasonality in sales. But this effect can be lessened by widening your market. For example, selling your summer-friendly products in hotter climates during the winter season at home.
- To stimulate fresh demand for your product. A product with moderate sales in the UK may prove to be a great success elsewhere.
To start to answer that question, you should begin by looking at two areas. The first deals with factors specific to your own company and its current circumstances; the second looks at more general factors relating to your industry’s position in the international marketplace.
Ask yourself some questions about your business:
- Are UK sales increasing and profitable? Most companies that start exporting successfully are already doing well at home.
- Do you have the necessary financial reserves to develop your export market potential?
- Are you already receiving a high number of overseas enquiries about your product? This can suggest potential demand.
- Are your production capacity and human resources able to meet the increase in demand that international trading may bring?
- Does your product meet the required overseas regulations and standards? If not, your capital outlay will have to be reviewed. Our International Trade Portal can help you identify what controls you will need to have in place.
Ask yourself the following questions about your industry:
- Is your product already being exported by other UK companies?
- Do any of your trade association reports recommend exporting?
- Are similar products to yours being imported from overseas for sale in the UK?
Our International Trade Portal can help you explore your market potential and build on your research. Planning, an effective export strategy that complements your overall business plan is important, particularly if you are seeking outside finance to support your expansion. A commitment to exporting must be evident throughout your company and your vision should have a truly international perspective.
Ultimately, only you can make the final decision about your suitability or readiness for exporting, but there is plenty of guidance available to help you reach that decision. The Department for International Trade (DIT) provides a range of diagnostic tools and a wealth of information to help you decide whether exporting is right for your business.
With global markets becoming ever more accessible, the skill lies in identifying which opportunities offer the best chance of success. Market research will be key to identifying the best foreign markets for your business.
To help you analyse the main differences between markets, we’ve included some questions dealing with the key issues. They can be summarised under the following headings:
- What is the makeup of the population?
- Is it growing or shrinking?
- What is the state of economic development?
- Is foreign investment incentivised or are imports restricted?
- What is the balance between free enterprise and public planning?
Political and social factors
- What is the political system of the country?
- How stable is it?
- What other significant considerations may influence trade with this country?
- How does the government view free trade?
- What are its monetary and credit policies?
- What is the administrative set-up (e.g. efficient or bureaucratic)?
- Do they have strong trade unions?
- Is bribery or corruption widespread?
- What are the main cultural considerations when doing business with this country?
- How does the local population split their expenditure between food, housing, leisure, etc.?
- What trends are there in current spending patterns – is an increasing amount of money being spent on leisure activities, for example?
- What trading pattern is there?
- What distribution methods are used?
- How are these changing?
- What legislation will affect your manufacturing, trading or performance (e.g. trading methods, company structure)?
- Are advertising and promotions restricted?
Sign-up to our International Trade Portal, to give you the background knowledge to plan with confidence and practical resources, from targeting the right market to making your first shipment. The useful links section at the end of this guide will also supply other key sources for information.
Many exporters start by identifying and targeting a small number of key markets. Look for nearby markets with low entry barriers.
Trade exhibitions are a good place to meet potential representatives of an area, and discuss a market's merits with other exporters. Our International Trade Portal can help you identify trade shows in your sector. In addition, market visits are an excellent way to personally experience the local cultural environment and help you understand how to conduct business in a particular area.
There are four main ways that you can get into a market:
- From your UK base This is usually most suitable where:
- Each customer's requirements are different and a high degree of custom-building is needed;
- Only a small number of orders, usually at a high value, are expected;
- Customers are very thinly spread throughout many different countries.
- With overseas agents/distributors
Using a retail or distribution specialist in your product or service area has a number of advantages, not least that they take on a good deal of the overseas legwork. Taking this approach, it’s important to draw up pre-agreed contracts, which clearly define the division of responsibilities and the channels of communication between you. The success of a distributor is often directly correlated to their commitment to their particular product. Be aware of your agent or distributor’s other commitments and spend a good deal of time making sure they understand and appreciate the specific benefits of your product or service.
- Using an overseas sales base
This requires a significant commitment to one country or area and is often necessary when sales are very high in that location.
- License Agreements
In this situation, a local business produces and sells your product under licence, and on your behalf. It’s often used when there appears to be no other way of making profitable returns from an area. For instance, many developing countries insist on the highest possible level of local manufacture as this represents the best long-term commitment to the region.
We’ve mentioned it already, but the importance of doing advance planning and research before implementing your export strategy can’t be stressed enough.
Research needn’t be expensive, or all originated by you. Plenty of data is available publicly. Governments and international trade bodies, for example, publish reports that could answer many of your questions. A word of caution though - check the report’s date. Find out how many people were interviewed for the research and who they are. Also, try to establish the original purpose of the research. This may be free information, but it needs to be relevant, recent, accurate and objective to be of use to you.
When you find that you need to conduct some research of your own, be very clear about what information you want from it. Try to achieve too much and the costs will soon mount up.
Among other things, your research must:
- assess current market potential for the sale of your products or services in your chosen export markets;
- help you identify and target a small number of key markets;
- reveal the level of competition in your export markets and tell you how you need to modify your products or services for export;
- flag up any barriers to entry in your chosen markets (e.g. import restrictions, national standards).
Our International Trade Portal is a handy tool that can support you in your research and is available to our customers. If you’re not already a customer you can trial the portal for 30 days.
Successful planning will help to ensure that adequate resources are always available to your business at the right time, to develop your export markets. Your business plan will be critical for gaining any additional funding required for export-led growth. Your export plan should be constantly reassessed and refined, so that your business is always ready to respond to, and take advantage of, new opportunities.
- Your product must comply with all the relevant regulations and standards that apply to the countries you are exporting to. You might choose to introduce changes yourself – cheaper materials for different marketplaces. Remember that product modifications will affect your production processes, and your budget.
- You might choose to introduce changes yourself – such as cheaper materials for different marketplaces. Remember that product modifications will affect your production processes, and your budget.
- Exporting may lead to changes in the way you manufacture and supply your product. When transferring manufacturing overseas or granting an overseas licence that includes production, you’ll need to keep a close eye on maintaining standards. Always ensure that your designer's specifications are strictly adhered to.
- If you are exporting to countries with different languages, your product packaging, advertising, literature and point-of-sale material will all need to be re-designed. You could also need to review your marketing materials for cultural differences, even in other English-speaking countries. For example, if your advertising relies on a very British sense of humour, the American market may not always respond to it in the same way.
A key risk for you, as an exporter, is that a customer will fail to pay promptly (or at all). It is vital you protect yourself against this.
Here are some of the measures you can take:
- Insure yourself against non-payment – You can insure against non-payment of export invoices with a specialist provider, or by arranging for your bank to take over the risk. For example, discounting your export sales ledger. Find out more.
- Try to negotiate payment up front – Consider negotiating payment up front if you have the slightest concern over your potential customers' ability to pay. If it’s a big project you are working on, ask for stage payments.
- Ask for a Letter of Credit from the customer's bank – This effectively means their bank guarantees the payment. Be aware, however, that over 50 per cent of letters of credit are turned down, when first presented to a UK bank, usually because of failures in the documentation.
- Consult the British Chambers of Commerce – If you require further reassurance on a customer's financial security, they can help trace companies in the UK and worldwide. They can also conduct press searches on companies or individuals, for a small fee, and can provide credit ratings or in-depth financial accounts for a UK or international company.
- Ask your suppliers for extended terms – Extended terms can help while you are developing demand from overseas and establishing a trading pattern.
- Familiarise yourself with international settlement terms – These vary greatly from country to country: 30-60 days is typical in Germany and Norway, 90-120 days in Greece and Turkey, and 120-150 days in Uzbekistan.
- Take advice about what is normal for the markets you move into – Generally, Western Europe operates on an open account basis, whereas Eastern Europe tends to use letters of credit. As far as possible, protect yourself in any pre-agreed partnership contracts.
- Investigate the UK Export Finance Schemes – These were introduced in 2011 to provide additional support for exporters. You can find out more at UK Export Finance. If you are in any doubt, you should seek professional guidance to help you manage your credit. The British Chambers of Commerce can point you in the right direction.
The profitability of your export orders can be affected by fluctuations in currency exchange rates. There are a number of ways you can protect yourself against this:
- Match income received in a particular currency to your expenditure in that currency, to offset any adverse financial implications.
- Another rising trend among UK exporters is borrowing money in the currency of the country of export - this is particularly effective in the Eurozone (the 19 countries participating in the euro) which has low interest rates. Such borrowing is repaid on receipt of the foreign currency sale proceeds.
The British Chambers of Commerce can advise you as to where to get help with managing your exporting finances. For more information on how Bank of Scotland can support with foreign exchange and your interest rate risk visit our International Pages.
CHANGES IN THE EXCHANGE RATE MAY INCREASE THE STERLING EQUIVALENT OF YOUR DEBT. All enquiries for foreign currency accounts will be referred to a specialist manager who will provide more information about charges for these services upon request.
Mastering international trade procedures will be key to maintaining a successful export operation. You may need to invest in both specialist training and computer software, to aid your management of international trading (and payment) processes. Exactly what you are exporting and where it is going will determine the kind of procedures you need to have in place, but these will normally include:
Chambers of Commerce offer advice and training courses on paperwork for the movement of goods. Certificates of origin are often required to meet customs and quota requirements in the importing country. The Chambers of Commerce are the designated authority for the issue of EU certificates of origin. The service is open to all businesses in the UK, at a reasonable cost, and there are beneficial rates for Chamber members.
Organising the physical movement of your goods will play a key role in your export operations. First-time exporters can discuss their plans with their local Chambers, to ensure the mode of transport and packing is best suited to your product, and to check that you haven't missed anything. A forwarding agent can also give you help with the packing and shipping of your goods. Finally, although there is no legal obligation to do so, it is generally advisable to get your goods insured. Marine insurance is the general term used to describe cover against damage to goods and loss while in transit. Policies will also cover road, rail and air freight.
Our International Trade Portal can help you manage your shipment, understand trade customs and calculate the cost of exporting. It’s free for customers who sign-up and available for a 30 day trial if you’re not.
The export of certain types of goods and technology is administered by governments, primarily to control the transfer of arms. This includes many items designed for civil use but termed 'dual-use', because they could be used for military purposes. These include:
- machine tools
- electronic equipment
- telecommunication equipment
- related components and spare parts.
In the UK, licences are controlled and issued by the Export Control Organisation (ECO) of the Department for International Trade (DIT). It’s vital that, if you are in any doubt about your need for a licence, you seek legal guidance, irrespective of the destination of your goods.
Where to go for support
- HMRC business guidance - explore quick and accessible content via webinar’s, e-learning tools and videos.
- Bank of Scotland International Trade Portal – background knowledge to practical resources for every step of the journey, from targeting the right market to making your first shipment.
- Bank of Scotland International – get the support you need to expand internationally from foreign exchange to International payments.
While all reasonable care has been taken to ensure that the information in this guide is correct, no liability is accepted by Bank of Scotland for any loss or damage caused to any person relying on any statement or omission in this business guide. This guide is provided for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each instance. When using these services your agreement will be with the relevant third party and their terms and conditions will apply.