How to do business abroad with risk management

06 July 2016 by National Bank

Here’s how to make your international expansion a success story.

For many Canadian companies, the prospect of expanding their business abroad is enticing. Here's how to make your international expansion a success story.

Before even thinking about expanding into new markets, a company has to have a solid foundation. "Starting to export is like starting a business from scratch, so your company must already be profitable and have sufficient resources," says Jean-François Ouellet, a professor in the Department of Entrepreneurship and Innovation at HEC Montréal. Don't forget that it takes roughly three years for a business to start reaping the rewards of its exports, so starting off on a strong financial footing is a must.

Test your market and potential customers

Just because a product does well here doesn't mean it will enjoy the same success elsewhere. This is why Ouellet recommends that entrepreneurs thoroughly research and analyze their target market before attempting to break into it. Trade shows, exhibitions and chambers of commerce provide an opportunity to connect with people who are already doing business in the countries that interest you.

However, in Ouellet's view, "nothing beats a trip to the country of interest and a firm handshake" to get the lay of the land and learn about the local culture. Cultural norms can vary widely from country to country, so be careful not to commit a faux pas. In Japan, for instance, it’s considered polite to examine your contact's business card at length, rather than shoving it quickly in your pocket. Do your research!

In any event, it's important not to rush or make any hasty decisions. "The successful exporters are the ones that took their time," says Normand D'Arcy, a manager in National Bank's International Services department.

Ask your bank for support

Your bank is another invaluable resource. "At National Bank, when one of our business clients wants to start doing business abroad, we assign them a specialist in international trade," explains Benoît Marcoux, Manager - Derivatives, Commercial and International Solutions and International Services at National Bank. "This specialist will work closely with the client's dedicated account manager to analyze the strategic plan, identify its main challenges and suggest solutions."

National Bank can offer its clients a wealth of expertise, thanks to several offices outside Canada and partnerships with major foreign banks.

According to Jean-François Ouellet, the internet is an inexpensive way to test the waters of your target market before taking the plunge. One option is to obtain mailing lists and contact potential clients to gauge their interest in your product. "By sending out several thousand emails, you will get a good cross-section of responses," says Ouellet.

Benoît Marcoux points out that entrepreneurs who want to export must be prepared to make some changes to their business processes. "The company isn't used to doing this kind of transaction. It's a change in model and environment. This calls for some adjustments, in advertising and marketing, for example."

Assess the business risks

Normand D’Arcy recommends that businesses get their bank involved as soon as possible, even before signing contracts with foreign clients. "This helps reduce the risks right from the start. We can give advice, provide financing for production, and help the client deal with longer payment periods, for example."

Currency exchange rates, meanwhile, can work for the exporting business—or against it. As Benoît Marcoux observes, "Currency markets have been extremely volatile in recent years, sometimes fluctuating by 10 to 20%. This can considerably reduce or even eliminate an exporter's profit margin. You can hedge against currency risk using a forward contract, i.e., by agreeing in advance on an exchange rate for a specified date." This kind of agreement allows the parties to set the exchange rate that will apply at the time of delivery.

Businesses also need to be aware of differences in methods of payment. "In the United States open accounts are generally used, while letters of credit are preferred in Asia," says Normand D'Arcy. Each method of payment has its own specific conditions. It pays to be familiar with them to avoid unpleasant surprises.

5 Steps to success

Discuss your plans with your bank.

Assess your company's ability to adapt to change.

Deepen your knowledge of the local business culture and research the potential of your target market.

Work with your financial partners to set up processes for financing, risk mitigation, etc.

When you've settled on a plan, make sure you stick to it!

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