What are the risks involved in exporting?

Solutions to protect your business

Distance to market, time zones, cultural and language difficulties, unknown standing of the buyer, country and regulatory impacts are just some of the issues you need to plan for. Foreign exchange, transport, fraud (internet and other scams), sanctions and money laundering all present risks for the exporter.

Before you enter into an agreement, you need to consider:

• Is the opportunity related to your normal business activity / goods flows or is it 'too good to be true'?
• Can your customer really handle the transaction size and do they have a history in importing?
• How well do you really know your customer? Have you done your research (not just from the internet)?

Risks of exporting should be balanced with the advantages of accessing new markets to grow your business.

When exporting to Europe, North America, Australasia, and other developed economies, risks are similar to those experienced when doing business in the UK. However, if exporting to emerging and developing markets, you may need to familiarise yourself with new areas of risk.

Tips from our trade advisers

• do your research
• be prepared, and develop a plan to manage risk
• develop a network of experts and experienced exporters as part of your plan to manage risk

Commercial risk

May sure you have assessed the possible risk of non-payment, looking at factors such as the liklihood of:

• your buyer becoming insolvent
• contract disputes
• late payment

In higher risk markets, or with new customers, it is important to specify acceptable and secure payment terms in your contract. You can also consider taking out credit insurance.

You should also make sure you have thought about how you will protect your intellectual property (patents, copyright, trademarks and design rights).

Political risk

In higher risk markets, consider any risks which could arise from:

• war, civil unrest, and acts of terrorism which interfere with the ability to do business
• expropriation of assets without compensation. This would only affect a UK company that had a business or other assets in a foreign country
• trade embargoes and sanctions which could immediately stop your exports to, or imports from, that country
• other 'non-tariff barrier' risks such as changes to requirements to clear customs, product and packaging regulations and government procurement restrictions

The risks here are often outside your control. However, these risks are more likely to be a concern when doing business with certain countries, so market selection is important. A good place to start research is the overseas business risk guides on GOV.UK.

Economic risk

In less economically stable markets, consider the likelihood of economic changes which could affect your exporting business.

High inflation

High inflation could mean customers are unable to pay invoices on time, or that potential customers will be interested in extended credit terms. The worst cases of high inflation can lead to hyper-inflation and in turn economic collapse. Only sell on secure terms to avoid defaults.

Fluctuating exchange rates

Exchange rates are the level at which one country’s currency can be converted into another. It fluctuates continuously throughout the day and the closing rate to buy and sell is published at the end of the day. You can eliminate any exchange risk by always selling in British Pound Sterling.

Your client may insist on paying in a foreign currency. Ensure that this is a major currency which is freely convertible. When you invoice in another currency you can limit your exposure by fixing your exchange rate with a forward exchange contract. This is a process whereby you essentially fix an exchange rate now to be used at some future date. You can discuss this with your bank, or read more about export invoice currency.

Exchange controls

Exchange controls can be imposed by a government on the purchase and sale of local currency. Today, countries which operate foreign exchange controls are mostly emerging markets.

The effect for a UK exporter could be a delay in being paid because the central bank in that country will not release foreign currency. Often, these controls lead to a black market in currencies, with two exchange rates: one official market rate and one unofficial market rate. The difference with the official rate is known as the black market premium.

A distinction should be made between when there is simply a delay caused by the central bank in that country, and a territory where there is an endemic issue resulting in export under invoicing and widespread smuggling. You should not get involved in any actions where you are breaking the law in that market or contravening the bribery act, as the penalties can be very serious.

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