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The unchecked financial risks of international business

Almost 85  percent of UK SMEs who operate internationally do not check the credit history of potential overseas customers or suppliers to verify whether a company is reputable, according to new research by Experian®, the global information services company.

The findings come as Experian launches its SME Reputation Index, a survey of over 500 financial decision makers in SMEs across the UK.  The Index illustrates attitudes towards safeguarding financial reputation. It shows that with the UK economy out of recession, two out of five (39 percent) senior decision makers at UK SMEs are firmly focused on increasing sales and profitability to grow the bottom line, compared to just eight  percent who are choosing to cut costs. Thirty  percent of SMEs will also be seeking out new customers to drive that growth, particularly younger firms who have been in operation for less than five years.

However, for those companies looking to expand by finding new markets overseas, it would seem that the same rules do not apply when doing business internationally, as they would at home. Among SMEs who operate internationally, just one in six (16  percent) check the credit history of potential overseas partners. This compares to 55  percent of all small and medium sized businesses operating in the UK and 28  percent of micro businesses who check the credit reports of suppliers before doing business with them. For businesses of all sizes there is always a risk in taking on a new customer or supplier and unless they undertake a credit check, SMEs have no way of understanding whether partners are creditworthy and can pay their bills on time or supply the goods promised.

According to Experian’s research, 56  percent of SMEs trading overseas assess businesses through relationship building.  Forty seven  percent say they gauge reputation by visiting their website, with 36  percent checking their customer references and credentials. A quarter of SMEs rely simply on undertaking desk research to compare a business with its competitors. With the CBI reporting that businesses are 11  percent more likely to survive if they export[1], and the government encouraging smaller businesses to export overseas, SMEs about to embark on international trade must be diligent in terms of who they do business with. 

Ade Potts, Managing Director of Experian’s SME business, said: “It would seem that in many cases the same rules of business that UK SMEs operate at home do not necessarily apply once they start doing business overseas, leaving them exposed to unnecessary risks and potential damage to their reputation. Whilst business culture differs from country to country, the fundamentals of ensuring a customer or supplier is financially sound and has the ability to pay on time still stand. Businesses should apply the same level of rigour to their relationships as they would when doing business in the UK, for example, checking supplier and customer credit reports to ensure they continue to not only survive, but thrive.”

SMEs should also consider the following when taking on new suppliers and customers overseas: Do your homework: You can never have too much information on which to base your decision for expansion, from understanding the macro issues such as the political, social and economic make-up of a country to specific details about local bylaws and competition in the market. There’s a wealth of information you can access from your desk, but if you can, visit your chosen market to understand first-hand any cultural differences.

Talk to the experts: It is worth speaking to trade advisors from organisations such as UK Trade and Investment and local chambers of commerce who work with businesses who successfully trade overseas.  More often than not, they will be able to put you in touch directly with companies who have already expanded so you can learn from their experiences.  They can also provide guidance on specific laws and export opportunities, as well as provide in-country contacts through their own networks, and support you to make the most of any business trips you embark on overseas.

Minimise your risk: Check the credit rating of any supplier, partner or customer abroad, just as you would at home. To help reduce your risk exposure, consider accessing an up-to-date international credit report which provides access to millions of businesses worldwide.  Not only will this help you assess a company’s credit history, but it will allow you to set appropriate payment terms and credit limits for customers. 

http://www.cbi.org.uk/business-issues/smes/exporting/

www.experian.co.uk

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