With an increasing number of US businesses considering trading overseas, it’s important to protect your business by minimizing the exposure to risk when dealing with partners who operate in Europe or the rest of the world.
Why This Matters
There are two main reasons for understanding the potential risks of doing business with companies operating overseas:
1. If you are dealing with a US based company, it may have a parent, sister or affiliate operating abroad, so while the US entity may be financially sound there might be significant exposure of risk with its international counterparts.
2. Financial interdependency and business success relates to both customers and suppliers
Categories of Risk
There are some slight variations in the way organizations conduct business day-today in the US. However, look outside the US and businesses can expect to deal with a range of different regulations, accounting standards, and language barriers.
A business looking to trade internationally should take into account three main categories of risk:
1. Commercial: non-payment, insolvency, contract disputes, overdue payment, intellectual property rights (IPR), brand and reputation
2. Political: Government change, war, riots, terrorism, border disputes, changes in laws
3. Country: exchange rate, high inflation, lack of hard currency
This means that credit checking both customers and suppliers is absolutely vital in order to:
- Make sure the company is who it says it is
- Check that the company is in existence where it claims to be
- Find out if it has reported financial results in line with local regulation
- Uncover any information that is available about how promptly the company pays its bills
Using this information, companies can construct sensible terms of engagement with prospective customers including line of credit, payment in advance and shorter payment terms
Protecting Your Business
Even in the US, debt recovery can be a complex, difficult and prolonged process, so including a jurisdiction clause in contracts ensures both parties agree to apply US law and that US courts have authority in the event of any dispute. A clear paper trail is also important to proving claims, especially where electronic evidence is not admissible.
Using Business Credit Reports
The good news is that credit information providers have expanded the scope of cost-effective reports, so that US businesses trading abroad have information on companies from across the world. Credit Reports cross reference and present company information in a common format which make the lives of credit managers and controllers much easier, as they can easily analyze the risk of doing business abroad. A company can use credit reports to check, before agreeing a commercial deal, that the company is solvent and not part of a failing parent group.
Information is key. Companies taking the first steps to do business overseas, or simply with organizations within a mixed group structure, will reduce their exposure to risk by being as well informed as possible about the customers and suppliers they are dealing with. Carrying out a credit check on every business before starting a relationship with them can significantly reduce the risk involved.
If you’re thinking of trading abroad, why not look at how Creditsafe International Business Reports? Complete the form on the right for more information.