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EXPORT RISK

Whether you are selling domestically or internationally, all business transactions carry some level of risk. However it is important to consider what additional risks does an export transaction carries, and how can these risks can be managed. First, let’s consider some export risks:

Exchange Rate Risk
Go back to the middle of 2008 and the Australian Dollar (AUD) was around 0.95 against the US Dollar (USD). Within a matter of months it had dropped to as low as 0.60, and now has gradually climbed back to around the 0.90 mark.

When the AUD fell, it was great news for exporters. Confidence was high, and all of a sudden our products were very competitive. Its climb back to the 90's has bought with it renewed challenges for exportres, and highlights that exchange rate risk needs to be managed carefully. For exporters selling in USD or another foreign currency, there are several methods that can be used to manage your exchange rate risk, including the following:

Foreign Currency Options give you the option, but not the obligation, to buy or sell a currency at a specified exchange rate on or before the expiry of a contract.

We would recommend discussing your options of managing your exchange rate risk with your bank, financial institution or foreign exchange provider. All methods of managing your exchange rate risk will come at a cost, which should be considered in your export pricing.

For those exporters who are selling in AUD, there would not be a need to manage the exchange rate risk. However, it is still important to consider the effect a moving exchange rate will have on the competitiveness of your product in a foreign market. As the AUD has risen, you could still be getting the same amount for your products, but that is no good if your products are priced out of the market, and you are not making any sales.

Credit Risk
It is no use making an export sale, if you don’t get paid. While this can be said for a domestic sale as well, securing payment from an overseas customer can be a lot harder than from a local company. So how can you ensure you get paid:

A letter of credit is an undertaking by your customers bank to honour payment providing certain conditions are met.

Credit Insurance will generally provide cover for up to 90% of invoice value in the event of non payment.

Many exporters are faced with no other alternative but to offer long trading terms in order to remain competitive. Terms can commonly be up to 90 days and therefore managing this is important. Many banks and financial institutions offer trade finance products which will help fund your debtors book and eliminate the problems caused by long payment terms.

The best methods for managing your risk will vary depending on your individual situation, so it is worth investigating all your options. Once again the methods of managing your credit risk will come at a cost, so these costs should be factored into your export pricing.

Transport Risk
Will your goods arrive in the same condition in which they left? Many exporters swerve around this issue by saying, “we sell FOB, so it’s our customer’s problem.” While this argument has some merit, it is in no one’s interest if a product arrives in a condition different to what it left. Your customer may believe you packed the goods incorrectly, you may believe your customers freight forwarder handled the goods incorrectly. Whatever the reason, transit insurance may provide a means of managing the risk of unforseen accidents occurring.

Political & Country Risk
A politically unstable country may result in the inability to convert a currency, an exchange  transfer blockage or changes in regulations which affect the import of your product. The Export Finance & Insurance Corporation (EFIC) can provide insurance against some of these political risks.
In any risk assessment it is worth considering how changes to regulations may affect the import of your product. How competitive will your products be if duty rates rise? Or what if there are tighter regulations on the import of your product resulting in increased costs. While it is hard to predict such changes, an assessment should be made before entering into long term agreements.

Fraud
Unfortunately there are many people who make a living out of taking advantage of unsuspecting businesses. These scams can vary greatly in sophistication, from repeated requests to provide product samples, without any intention of purchasing, to the more elaborate scams where you are invited to visit a buyer to sign a “contract”, however the buyer ultimately disappears after you visited them and spent time and money on them.

The best thing to remember is, if it sounds too good to be true, then it probably is. Do your research on any suspect buyers, and look for holes in their story. Austrade or your State Government Trade office can also provide assistance to help you assess any potential customer.

Export Assist has been successful in identifying a number of potential fraud cases with our customers. Some did just sound too good to be true, while others were quite elaborate. Take the time to assess all opportunities as they may not always be what they appear to be.

The Risk Management Matrix
While the risks will vary from exporter to exporter, country to country, and customer to customer, it is important to make a thorough assessment of all risks prior to entering into any contract or agreement. Creating a simple Risk Management Matrix will allow you to assess the likelihood of a risk occurring and the consequences if that risk did occur.

Export Assist has developed a simple tool to allow you to measure these risks, create a risk score, and provide an overall risk rating. For further information, please contact us.

The information provided is to be used as a guide only, and without warranty of any kind. We recommend that you contact Export Assist ™
to discuss your individual situation.