The global supply chain is never without risk. Buyers (Importers) and Suppliers (Exporters) should always anticipate risks when trading internationally. Those that know how to deal with these risks will be better prepared for the future.
Ignoring global trade risks can be disastrous. Companies must prepare themselves (financially and strategically) to manage risks appropriately. International Suppliers and Buyers that have ignored risks in the past have collapsed.
This post will look at three significant risks that companies in global trade could face.
International Trade Risk #1: Lack of Trust
47% of Buyer-Supplier contracts fail, primarily due to a lack of trust between both parties.
It takes time to build trust between companies and that trust can be easily broken. For example, if a Supplier suddenly raises the prices of goods without warning, its Buyer may feel slighted and take its business elsewhere.
Or a Buyer might default on invoice payments and cause cash flow problems for a Supplier.
Such examples are typical of incidents which can affect the trust between parties.
Buyer-Supplier networks are complex and hard to manage. Ideally, both parties should form transparent relationships in which they communicate openly.
International Trade Risk #2: Misaligned Objectives
Every Buyer and Supplier has different objectives, which should be clearly communicated between parties and understood by both.
The Supplier needs cash to run its business, while the Buyer needs time to distribute and sell the goods before payment. This dynamic is challenging, particularly for Suppliers in emerging markets that cannot access financing easily. On average, Buyers take 68 days to pay invoices, which can leave Suppliers struggling financially.
Clear and open communication between parties can create a compromise that is mutually beneficial, with both sides aware of the difficulties faced by the other. A positive Supplier-Buyer relationship is one in which both realise that they stand to benefit from supporting the other where possible.
International Trade Risk #3: Geopolitical Climate
Geopolitical risks are external risks that neither Buyers nor Suppliers can control.
A single incident can easily disrupt global supply chains. Therefore, Suppliers AND Buyers should pay close attention to the geopolitical climate in all regions they trade in.
It’s crucial to be prepared with a contingency plan in case supply chains are disrupted. Nobody saw the Covid-19 pandemic coming, but there is no doubt that companies around the world have now tried to prepare themselves for similar difficulties in the future.
How to Avoid Global Trade Risks
International trade risks are ever-changing and unpredictable but companies can take steps to protect themselves. Even if global economies struggle, there are ways to minimise the impact on your firm.
Here is a quick checklist to help Buyers and Suppliers avoid as many risks as possible:
Establish trust and get to know the people you’re working with before the contract is signed.
Align objectives (as closely as possible) from the beginning. A good deal is one in which both parties feel they are benefiting equally.
Share information about geopolitical risks and support good trading partners whenever possible.
All risks discussed above can end up affecting cash flow and, in the more extreme cases, even lead to bankruptcy. All companies should ensure that they have ready access to funds to bridge gaps or dips in working capital. This could be in the form of bank loans, lines of credit, supply chain finance or one of the more recent digital forms of ‘intelligent financing’, such as online invoice factoring.
Trade financing is one of the most effective ways to protect a company from cash flow instability.
Trade finance secures international trade transactions by:
guaranteeing payment for the Supplier; and
ensuring delivery of goods to the Buyer.
For example, in accounts receivable financing, Buyers can still enjoy flexible payment terms while Suppliers can receive payment up front. This means they don’t have to wait 30-120 days for funds. The third-party financing provider advances this cash and collects payment from the Buyer when the invoice falls due.
If you are interested in learning more about financing to avoid cash flow problems, Stenn has a dedicated FAQ section where you can find more information. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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Disclaimer: The above article has been prepared on the basis of Stenn’s understanding of the subject. It is for information only and doesn’t constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.