Even in the case of companies with a local scope of action, the current context of globalization of economic activity has repercussions, accentuated by the spread of new information and communication technologies. The use of means of payment adapted to the Internet environment becomes a universal need. Independently, companies that carry out import or export transactions of goods have to resort to the different alternatives offered by the financial system to support foreign trade transactions. Additionally, there are different instruments such as exchange rate insurance, options, futures, etc., which allow covering currency risks.
Addressing an internationalization process is a challenge for the company that requires deep reflection on business aspects, both internal and external. A secured access to international markets must be based on an analysis of the general situation of the company and the competitiveness of its products in the destination markets. Internationalization is a process that can range from simple exports to complex relocation of the company, going through different stages of investment and international alliances.
In an international sale, the parties agree on the most appropriate means of payment, considering issues such as country, type of merchandise, trust, sector practices and customs, bargaining position, etc. However, there are a number of elements of international trade that must be known to assess the risks and opportunities implicit in each transaction, such as:
- Currency risk: It is understood as the possibility of loss or profit caused by the movement in the exchange rate of different currencies and appears when a sale and purchase transaction is invoiced or financed in a currency other than the national one. To protect mark-ups and not be subject to variations in the price of the currencies that must be used to make payments or collections, companies can use hedging instruments.
- Default risk: In an international or national sale, the selling agent involved in the transaction faces a default risk. In foreign trade transactions, this risk can be a commercial risk, due to customer insolvency, or a country risk, when the default is caused by a risk in the importer’s country. This issue should be taken into account when dealing with unstable countries whose political or legal affairs could prevent the transfer of funds. To avoid or reduce the default risk, a company can:
- Get information about the possible foreign buyer through commercial reports, lists of defaults, solvency analysis of insurance companies, etc.
- Find the appropriate means of payment, which presents greater collection guarantees, such as letter of credit, confirmation of letter of credit, international guarantees and collateral, stand-by letter of credit[1], etc.
- Take out an export credit insurance policy to cover both the default risk and the country risk.
- Legal risks and conflict resolution: It is essential to take care of the wording of the contract and its general conditions, including its own provisions on applicable laws, competent courts in case of conflict or breach of any of the parties. It is advisable to submit to national law or arbitration by the International Court of the International Chamber of Commerce (ICC). Distances are an element to consider in international sales. Goods are subject to long journeys and transhipments. Consequently, shipping from one country to another may be at risk of loss, damage or deterioration. These unforeseen situations can cloud the climate of trust between the parties, to the point of leading to a lawsuit. When drafting a contract, if buyer and seller remit specifically to the Incoterms (international commercial terms which are included as clauses in the agreements) of the ICC, they can be sure that their respective responsibilities are clearly defined, avoiding any chance of misunderstandings and disputes.
- Other risks: It is necessary to consider the lack of previous references about suppliers or clients, the cultural and language barriers, the country practices, the merchandise, the delivery times, the packaging and the previous controls, the documentation to provide at customs, the necessary quality certificates, etc. International transport implies that goods travel great distances, requires more transhipments and carries more risks of damage or loss, as well as the presence of more logistics operators. In short, to overcome these barriers, companies must consider hiring a transport insurance with the coverage that is considered adequate, a well-formalized transport contract, boarding in accordance with the agreed conditions, requesting inspection certificates issued by recognized experts[2], including in the contract specific provisions related to force majeure events, requesting business reports about a new supplier or client, and even engaging a freight forwarder.
[1]Standby letter of credit: class of letter of credit, understood not as a means of payment, but as a guarantee instrument. In the stand-by letter of credit, as in the letter of credit, there is an applicant, a beneficiary and an issuing bank with respect to the guarantee.
The issuing bank will be obliged to pay the beneficiary against delivery of the documentation indicated at the opening of the standby, generally through a written claim from the beneficiary. The commercial documents are sent directly by the seller to the buyer, who can withdraw the merchandise at customs without the intervention of financial institutions.
[2] Commercial intermediary (seller’s commission agent) who is in charge of carrying out all customs and administrative procedures, and who takes out and negotiates transportation services on behalf of the exporter to ship the merchandise to the importer.
