In today’s economic atmosphere, businesses, especially manufacturers, need to expand into new markets in order to grow. With saturated local markets, there is a wealth of opportunity in existing and emerging foreign markets.
But for many smaller manufacturers, creating a global presence constitutes more risks than they are used to or comfortable with. This perception of risk has served, in many cases, to keep business out of areas and markets that can be profitable.
There are risks to any foreign venture, but those can be controlled and mitigated with the proper financial structure and relationships.
Global financial products
Whether your company is just beginning to move into foreign markets, re-evaluating global financial agreements or looking to expand its international market presence, every business should have a strategy for reducing potential cross-border credit risk.
An overseas business must first establish secure relationships with its buyers. For companies entering foreign markets, these buy/sell relationships begin with securing export letters of credit and standby letters of credit needed to begin the process of selling to new partners, as well as insuring payment structures.
Online financial products like Authorities-to-Pay trigger overseas payments to suppliers only after they have shipped, all in real time so they don’t affect existing credit lines. To manage payments in multinational markets, exporters require banking tools that permit business to pool, exchange and move funds across multiple countries with one portal.
In the past, foreign payment transactions were costly and inefficient, tying up capital. But with technology, online, real-time multiple account monitoring improves payment risk and foreign and domestic cash flow.
Volatility risks
The euro has decreased but not eliminated foreign currency volatility risks. Despite the relative stability the euro has brought to politically and economically inconsistent regions of Europe, there is always risk involved when dealing in a foreign currency.
The biggest risk is exposing profit margins to fluctuating currency. If a U.S. company is selling in euros, from the day that contract is entered until the collection date, the exchange rate could move significantly.
It’s important for a business to hedge exposure to foreign currency fluctuations. Depending on current and projected rates, simple spot and forward contracts or more sophisticated swap and option transactions are needed to protect profits.
With currency rates subject to global events, even a small movement can significantly decrease profits. However, with the proper advice and 24-hour access to foreign currency exchange, business can move assets and marginalize foreign exchange exposure.
Regardless of the risk, in today’s market, doing business in local currency can be beneficial. With current exchange rates, U.S. exporters have benefited from doing business in euros instead of dollars.
Financial products that include multiple payment services, foreign currency drafts, wire transfers and cash letter deposits make dealing in foreign currencies a cost-effective alternative to settling in U.S. dollars abroad.
Cash flow forecasting
Besides mitigating foreign exchange risks, multinational foreign accounts facilitate comprehensive cash management. And when capital can be scarce, it is just as important to manage cash flow overseas, as it is at a company’s U.S. headquarters.
Global cash management tools allow financial executives or accounting staff to check international account balances, determine available cash positions, review transactions and move funds globally in order to analyze cash flows and determine the most efficient global account structure.
By combining balances on different accounts, it consolidates statements, allows a business to view all balances, monitor global account transactions, analyze cash positions and automatically reconcile expected transactions.
Global management also allows for innovative account structures and electronic cash pooling techniques that substantially reduce the costs associated with international transfers.
Just being aware of the risks involved in overseas business and having systems in place to mitigate that risk allows exporters to make decisions quickly and profit from expanding markets.
Roy D. Hasbrook ([email protected]) is senior vice president/division manager of commercial banking. LaSalle is uniquely positioned to help its customers succeed in the international marketplace. As a subsidiary of ABN AMRO Bank, we offer an advantage that few banks can match-local support in more than 3,400 locations in over 60 countries and territories. Anywhere your business takes you, we can meet your needs.
