Why should you expand your business internationally?
Expanding your business internationally rests on three key strategies: offshoring, exporting and importing.
Offshoring: Involves moving all or part of your operations abroad. This strategy can have a number of benefits. Here are a few of them:
- Lower labour costs
- Decreased transportation expenses
- Increased flexibility when it comes to labour and tax laws
- More opportunities, depending on your industry
Exporting: When you start selling products and services abroad, your potential market will grow considerably. It's simple math: the population of the United States is nearly 9 times larger than that of Canada, while China's population is 37 times larger.
Importing: Purchasing certain products and services in other countries or territories could generate substantial savings. You'll also be able to choose from a wider range and access some innovative offers.
Are you considering importing? Read our article 6 tips for importing to Canada.
What are the risks to consider when expanding your business internationally?
No matter which international development strategy you choose, your company will be exposed to various risks (at different degrees). Here are a few of them:
Foreign exchange risks
Considerable time can go by from the signing of an agreement to delivery and payment. If the exchange rate (the value of one currency compared to another) fluctuates significantly during this waiting period, your financial forecasts may be adversely affected.
Example: A Canadian company sells products in the United States and is paid in U.S. dollars. By the time payment is received, the value of the U.S. dollar has fallen. Result: After conversion to Canadian dollars, profits are lower than expected.
Pro tip
Even historically stable currencies can occasionally go through periods of volatility. That's why it's so important to consider this factor and use a foreign exchange risk hedging solution foreign exchange risk hedging solution when necessary.
Need advice about exchange rates? Read our article How to secure a better exchange rate.
Payment risks
You want to get paid, and get paid on time. As your business grows, your transactions, clients and suppliers are likely to increase in number and your operations may get more complex. Whether you're doing business abroad or not, the more transactions you're involved in, the higher your payment risks.
Pro tip
A number of solutions to protect your cash flow are available. Here are some instruments to help you manage your international transactions:
- Payment in advance
- Letter of guarantee or standby letter of credit
- Documentary credit (letter of credit)
- Documentary collection
- Open account transaction
You can also access supply chain financing solutions. These solutions can cover potential payment delays or missed payments, in addition to providing financing.
They include:
Reminder: These solutions allow your company to avoid long delays in payments and instead focus its cash flow on value-added activities.
Tax and legal risks
These risks differ from one place to another. Even though from a legal standpoint Europe and the United States have many similarities to Canada, that doesn’t necessarily mean that business will be easier to conduct there compared to elsewhere in the world. You'll also need to learn how to deal with various free trade agreements.
Get support from legal, accounting and financial advisors before you break into foreign markets.
Cultural risks
International business can be full of surprises. You'll need to adjust your approach from country to country to achieve success. In Canada, we have a very North American approach: straight to the point, sometimes with a touch of humour. In some other countries, business is conducted with much greater formality.
Political risks
The geopolitical landscape can shift very quickly. A country that was easily accessible can suddenly become very unstable. These changes can have a significant impact on exchange rates, interest rates or a company’s ability to make payments.
You'll also need to consider other political factors. For instance, when it comes to customs or tariff policies, a country's decision to subject your product to new protectionist measures can have an impact on your company’s competitiveness.
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What are some best practices to adopt when expanding your business internationally?
Taking out credit insurance
Credit insurance will protect you in the event of payment delays or missed payments. It covers risks associated with the following situations:
- Bankruptcy of a client
- Payment default
- Problems in another country
- Termination of a contract
- Refusal to take delivery
- Payment delayed because funds are blocked or there is an issue transferring funds
- Operating or import licences cancelled or not renewed
You can also use credit insurance as financial leverage. Since it allows you to obtain equivalent financing, credit insurance should cover 90% of your debt (industry standard).
Working with the right partners
A number of businesses and federal or provincial organizations provide support to companies considering going into business internationally. Here are a few resources:
- Export and Development Canada (EDC) (link to external site). EDC offers a number of solutions for businesses: credit insurance, loan guarantees, financing, etc.
- Various provincial organizations across Canada. Many Canadian provinces have organizations that offer training, trade missions and diagnostics.
- Trade Commissioner (link to external site). This team can support you with your export projects. Note that a number of programs are offered free of charge.
- Your financial institution. You need to choose the right bank to support you in your international expansion. With National Bank, you can open a foreign currency account connected to a global payments system so you can easily carry out secure transactions (like international payments).
Expanding your network
Do you already know which country you're planning to expand to? Consider visiting that country. You'll get an opportunity to build relationships with potential partners, collaborators and investors. You may also want to participate in international trade shows—you could discover new talent to help accelerate your growth.
Good to know: Canadian embassies and consulates (link to external site) can support you in your networking efforts abroad.
Expanding your business internationally opens up all sorts of business opportunities. You could grow your market or reduce your expenses. To minimize risks, you'll need to be well-prepared and work with the right partners.
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