Doing business overseas can be stressful when you aren’t familiar with the customs of that particular country. Concerns that are easily addressed with the company across town or even on the opposite coast become much more challenging to solve when the potential trade partner is located halfway around the world.
It’s more than just being able to speak the local language, says Gabriel Aguirre, vice president and manager in the International Banking Department at Manufacturers Bank.
“You need someone who knows the local bureaucracies, understands the business culture and has the ability to establish long-lasting relationships,” Aguirre says. “These are things that are not synonymous with any one country. When you aren’t aware of these small nuances, it can be a real challenge in growing your business.”
Smart Business spoke with Aguirre about what a bank can do to facilitate international growth for your business.
What’s the key to establishing a strong presence in a foreign country?
Companies often look to retain local agents and establish a distributorship or hire a local sales force to be on the ground in that country. Banks keep a very close eye on the countries that are sanctioned by the U.S. government. Once you’ve selected the country you want to do business in, you can take a look at the historical data on the currency.
It doesn’t always give you an accurate look at the future of that currency. But at least it gives you an idea of its volatility.
Taking steps to mitigate currency fluctuation is something a company needs to be concerned with right out of the gate. When you have the tools and mechanisms in place to do that with the local bank, you can lessen some of those exposures.
What are some key aspects of international trade that need to be addressed?
You should have a business plan to use as a talking piece with your banker. This instrument clearly provides some of the important details such as payment terms and mechanisms, delivery logistics, local representation, and countries and currencies you are willing to trade in.
You may choose to trade using an open account, which is a credit relationship where a buyer pays either upon the receipt of goods or on a deferred payment basis. The question becomes, how do you know that you are going to get your money when you ship your product to another country?
Banks can help walk you through the process from the beginning point of identifying the sale opportunity all the way to the actual payment of that transaction. How do you get the product there logistically? What expertise can freight forwarders provide to ensure a successful delivery?
When you don’t take the time to work with your bank and establish long-term relationships with buyers in that country, you’re not going to have a competitive edge in that market. As a result, you’re going to work yourself out of a lot of customers.
How does hedging help you mitigate risk?
When you are trading internationally, you can either do it in the U.S. dollar currency or in the currency of the country you are trading with. One way to mitigate currency fluctuation is by hedging that transaction on day one.
Let’s say you have a contract that’s $100,000 and the product is going to be delivered in 60 days and payment could come in 30 days. Now you have a 90-day window. Your bank can help you hedge that on day one by fixing a foreign currency rate on day one that becomes available on day 90. When the buyer pays in its national currency, he’s already fixed his profit margin.
There are different mechanisms that a bank can provide that deliver financing to buyers without impacting cash flow. There are also ways to guarantee payments that allow for an open account arrangement with a foreign buyer and foreign currency hedging that competes in the local country.
Make all these details part of your business plan and it becomes an open-ended discussion with your bank to solidify the companies you should be considering.
Insights Banking & Finance is brought to you by Manufacturers Bank