Navigating International Trade
About 95 percent of the world’s consumers live outside of the United States. If you are conducting business only domestically, you’re reaching just a small share of the market. Likewise, if you’re in a highly specialized field, you may not be able to purchase the products you need locally. International trade allows businesses to diversify their portfolios and insulate against periods of slower growth in the domestic economy.
Making the transition from domestic to international trade can be challenging for U.S. companies for several reasons, including laws, regulations, currencies, political environment and even culture. These challenges can affect a company’s ability to find suitable business partners overseas, to manage the sales cycle and to collect payment in a timely manner.
The good news is that companies interested in engaging in international trade can manage the risks inherent in these transactions through several means, including:
- Import and export letters of credit. You can mitigate your foreign payment risk by asking your customer to open a letter of credit in your favor. You can then get added protection from foreign country or foreign bank risk by requesting that a reputable bank confirm the letter of credit.
- Documentary collections. While not as secure as letters of credit, documentary collections can facilitate international transactions at a lower cost while offering more protection than open account terms. Exporters can receive payment upon shipment and presentation of shipping documents and control the flow of title documents export goods while offering terms to the buyer.
- Foreign exchange. You can help manage your exposure to currency exchange rate volatility through a number of hedging tools, including forwards, options and swaps. These tools can be used on both import and export transactions and may reduce currency risk for both foreign currency and U.S. dollar transactions.
- Foreign currency accounts. You can also reduce exchange rate risk by holding funds in foreign currency as you collect and remit payment to foreign business partners.
In addition to these services, the U.S. Commercial Service stands ready to offer additional expertise in foreign markets. This federal agency connects companies with international buyers through a network of trade professionals located in more than 100 U.S. cities and American embassies in more than 70 countries. It is geared to assist U.S. businesses in actively pursuing overseas sales, and it helps to remove many of the uncertainties tied to international trade.
International business often contains terms and conditions unique to each company or each transaction. If you need to manage global trade or are considering expanding into foreign markets, it is important that you work with a financial partner with the experience to navigate international affairs and the commitment to address your specific needs.
Mike Hammontree can be reached at 615-744-3713 or by email at mike.hammontree@pnfp.com.
