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iStock 1281959537
iStock 1281959537

Growing Global: Successfully transitioning from domestic to international trade

By Alex Vavilov, Chief Commercial Officer for Stenn International

With statistics suggesting that around 65 percent of businesses fail during their first decade, it is critical that companies plan for progressive growth and for mitigating the challenges that threaten to throw them off course.

One way in which businesses can increase their market reach and protect themselves against domestic trading risks is by expanding into international markets. However, this strategy is not without its risks.

So, how can ambitious businesses smooth their transition from domestic to international trade and reap the rewards that diversified markets offer?

Tackling trade tariffs

One key challenge is the tariffs often imposed on cross-border trade.

Some countries charge tariffs on any goods imported from other nations – an extra cost that businesses must face and decide whether to absorb or pass on to their customers. However, a bigger challenge is in managing fluctuations in those tariffs. Countries may increase trade tariffs without warning, leaving businesses to simply foot the bill.

For example, fears arose last year around a potential trade war between the UK and EU, a conflict which would have suspended their existing trade deal and seen trade barriers imposed.

The threat of new tariffs, or increases on existing ones, can have a drastic impact on businesses – especially new enterprises and SMEs that operate with smaller profit margins. For many firms, these additional taxes can mean the difference between operating in the black or the red.

Businesses looking to shield themselves from the impact of unexpected tariff hikes should regularly search supply chains for providers and materials that can make international trade deals more cost-effective, so that they’re ready to set up new partnerships if the worst happens.

They should also have contingency measures in place, such as applying for tariff exceptions to buy additional time if tariff rises occur unexpectedly.

Culture clashes

Each international market has its own expectations when it comes to marketing, communications, manufacturing, material standards, and even cultural and religious restrictions.

Those who fail to complete diligent market research risk not only alienating their new audience but even breaching local laws and facing financial punishment.

This has been the case for large companies that are household names, let alone smaller businesses struggling to establish themselves. When HSBC launched its global marketing campaign based around its slogan ‘assume nothing’, it was forced into a $10 million (USD) U-turn because the phrase transformed into the frighteningly uninspiring ‘do nothing’ when translated into different languages.

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Similarly, UK grocery giant Tesco struggled to break into the US market when it failed to acknowledge the buying habits of American shoppers. Under its US brand name ‘Fresh and Easy’, Tesco focused on providing British-style ready meals in its smaller convenience stores. However, the business failed to entice those US customers who preferred to buy groceries in bulk and weren’t attracted to Fresh and Easy’s British cuisine offering.

To avoid similar errors, firms are advised to partner with local agencies or specialists in their new markets. Local translators can ensure that messaging is accurate and on-brand, and marketing specialists can deliver targeted campaigns that appeals to local customers.

Navigating legalities and logistics

International trade naturally entails greater legal and logistical challenges than domestic deals. Not only does each country have its own legal regulations but there are also ever-changing international relationships to contend with.

This is exemplified by recent Brexit agreements which have created additional red tape for UK businesses trading overseas. Restrictions include new fees and forms when exporting goods to EU nations.

Research suggests that UK exports to the EU dropped temporarily by 45 percent immediately after Brexit, demonstrating the detrimental impact of these additional demands.

Firms that fail to protect themselves against sudden changes to international rules and regulations may be forced to operate at a loss or even pause trading.

So how can businesses face these challenges?

Firstly, they must remain agile in terms of supply chains. This may include digitising elements of the supply chain to save costs.

Secondly, increasing their purchases orders may help businesses avoid future complications or tax hikes. Firms that purchase materials in bulk at a current price can buy themselves time to adjust to the effects of future regulatory changes.

The role of ‘accounts receivable’ financing

Arguably, the financial demands of international trade are the biggest barrier for ambitious companies looking to expand into international markets. Trading with new foreign suppliers often means paying up front, with many suppliers unwilling to trade on deferred payment terms because they don’t wish to wait up to 120 days for payment.

But buyers usually prefer to make purchases with ‘open account payment terms’, giving them time for receipt, distribution and sale of the goods.

This mismatch creates a cash-flow problem for one party or the other. With money tied up for months, businesses risk going into debt and not being able to fulfil new orders.

However, invoice financing (sometimes called ‘accounts receivable’ financing) can offer a solution, especially for firms with limited access to bank loans. This solution involves the supplier selling its invoices to a third-party finance company at the time of shipment. The finance company then collects the payment from the buyer on the due date, which may be months later. This gives an immediate cash injection to the supplier yet provides the buyer with the time it needs to receive and use the goods before payment is due.

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