In about one month's time this winter, Russia invaded Ukraine, Canadian truckers blocked key border crossings and a U.S.-bound ship loaded with thousands of luxury vehicles sank off Portugal's coast.
The world has always represented a complex blend of business opportunities and challenges, but for companies operating outside the U.S. in the 21st century, conditions are seemingly in an endless state of flux.
Furthermore, regime change, dramatic economic turns or the sudden appearance of a vendor or investor on the federal government's terrorist watch list can upend a company's carefully crafted global strategy. Sometimes in a matter of hours.
For companies ill-prepared to buffer their bottom line from such turmoil, the ripple effects can be devastating.
"As strife and disagreement escalate around the world, it becomes more challenging to insure against the risks that could be inside those challenges," said Todd McLean, president of BOK Financial Insurance.
Assessing potential issues early in the planning process is crucial, as it can pave the way to two key approaches to mitigating risks: international trade credit, which is a type of insurance designed to facilitate financing activities, and currency management strategies, which can smooth the impacts of volatile foreign exchange markets.
"The markets are smart at knowing where risks are before they're commonly known and promptly pricing in those risks."- David Maher, manager of international sales and trading for BOK Financial®
"The markets are smart at knowing where risks are before they're commonly known and promptly pricing in those risks," said David Maher, manager of international sales and trading for BOK Financial®. "Risk analysis is a key factor to deciding whether to do business somewhere, along with your historical analysis, because you can either avoid a place where something's going on or build in a premium to protect your business."
International trade credit aids borrowing
To keep cash flowing while invoices work through customers' systems, many businesses rely on factoring, or borrowing against accounts receivables. When working with customers outside the U.S., many firms purchase international trade credit insurance—either proactively or in response to a lender request—to safeguard the collection process from global uncertainties.
"These policies provide a higher level of confidence and comfort that payment will happen on the accounts receivables, turning questionable collateral into good collateral," McLean said. "A company's management must understand how those receivables, or collateral, are being valued from the lender perspective and how trade credit insurance can help ensure that they fit within the borrowing requirements."
McLean acknowledged that risk profiles can improve as much as they deteriorate, but no one likes surprises. Especially those that endanger the ability to pay vendors and employees or threaten fulfilling loan covenants.
"As much as our supply chains flow one way today but may change tomorrow, the same is true for credit insurance: it might be available today, but things could change tomorrow as conditions evolve," he said.
"You don't have to be an expert on every financial solution, but being knowledgeable and asking your financial institution questions will serve you well as you pursue these business opportunities."- Todd McLean, president of BOK Financial Insurance
Foreign exchange eases transactional impacts
Global instability can also wreak havoc on currency valuations, where a 20% swing can turn a $1 million contract into an $800,000 or $1.2 million deal, resulting in severely squeezed margins or an inefficient use of capital, Maher said.
He added that many businesses exacerbate currency-related challenges by insisting on exclusively dealing in U.S. dollars. Without allowing for local currency moves, the singular focus can result in pricing that exceeds local alternatives and therefore reduces sales volumes abroad.
"If the quality is equivalent between a product that's priced higher because it's tied to the dollar and one that's priced lower because it's tied to the local currency, the customer will go for the cheaper alternative," Maher said. "To be successful outside of the U.S., you must be open- minded in a manner that makes it easier for foreign buyers to buy your product."
To minimize the impact of fluctuating sale prices on profit margins, Maher explained that forward contracts offer a type of insurance by locking in the exchange rate between currencies.
A multi-faceted commitment
For most U.S.-based companies, the attractiveness of setting up shop elsewhere is rooted in the financial boost that can result from cheaper labor, easier access to raw materials or higher margin operations. Yet, to gauge the likelihood that the country will be invaded, the supply chain will fail or longstanding regional animosity will effectively halt business activity, due diligence must extend beyond the company and industry level.
McLean and Maher encourage business owners and management teams to consider:
- The political stability of the other country
- The availability and cost of labor, compared to alternatives
- Regulations, including access to the country's banking system
- Taxes, including potential issues regarding the repatriation of profits earned in other countries
- The convertibility of the currency
- Time zone differences and challenges
- The internal enthusiasm for taking on such an endeavor
"There are many factors involved with expanding outside the U.S., but for financial matters, many may be resolved through foreign exchange or credit insurance," McLean said. "Then it comes down to which of these tools best solves the problem."