Economy Insights

Worldwide Banking 101

Dollar Cents
Matthew Burke
Written by Matthew Burke

Every transaction in the business world contains some type of risk; but that risk is usually offset by the promise of reward, or a profit. It is up to ownership and management to balance this risk and reward dynamic, in order to find profitable markets at an acceptable risk tolerance. But all too often, the risk tolerance for a small business seems to reach its peak when the possibility of exporting the product arises.

From a sales and marketing perspective, there has never been a better time for companies to look internationally for new, profitable customer relationships. As the internet has made the world “smaller,” Nebraska businesses find that it is much easier to find new customers while demonstrating their product to a global audience. International companies find that the Nebraska reputation of delivering quality products and friendly customer service throughout the world puts many foreign buyers at ease.

THE BALANCING ACT:

So how does a small business balance the risk and rewards that come from selling globally?  Where can a small business learn about the intricacies of international trade? The short answer for most is finding quality business partners, including a banking partner that specializes in global services. Other equally important partners include the U.S. Commercial Service office in Nebraska, a quality freight forwarder and a foreign receivable insurance broker. After the proper team is assembled, a small business will be able to mitigate foreign buyer payment risk, transactional risk and even political risk.

THE BANKING COMPONENT:

The financial institution is a key player in a small business’s international sales program. In many cases the payment of funds is done through banking channels (wire or check), and keeping your bank abreast of your international sales orders is a good way to receive those funds in an expedient manner. A savvy business will lean on their banker to provide a crash course in international banking, international payment methods and risk mitigation. If this is not a specialty of your financial institution, find a banker who is willing to listen to your needs and then provide a custom fit solution for your international sales program.

THE PAYMENT COMPONENT:

Let’s be honest, the sales process for a small business is not complete until the cash is in your hands, so making the choice of which payment terms to utilize is crucial. Below is a quick description of some of the most common payment terms and how they work:

  • OPEN ACCOUNT: This is the best situation for the buyer. The buyer receives the final goods and makes the payment at a later date. This can create cash flow issues for the seller, as payment is usually made 30, 60 or 90 days after delivery.
  • CASH IN ADVANCE: This is most advantageous for the seller. Cash is received up front, before goods are shipped to the international customer. In a competitive selling environment, cash in advance is rarely used.
  • LETTER OF CREDIT: Payment is assured as long as all conditions of the letter of credit are met. A letter of credit substitutes the credit-worthiness of your buyer for their international bank. All documents flow through banking channels.

FOREIGN CURRENCY

The FX market is one of the world’s largest asset classes by trading volume, with $744 trillion a year according to NASDAQ. Most small businesses are unable to devote adequate resources to keep up with this ever changing FX market. The volatility of the FX market is primarily based on four factors including economic news, market sentiment, politics and central bank intervention. Utilizing an international bank’s expertise in the foreign exchange marketplace has some huge advantages when selling and invoicing in a foreign currency.

  • Global customers can compare pricing (apples to apples).
  • Allows competition against in-country competitors.
  • Allows a small business to compete against multinational firms with local presence.
  • Risks can be mitigated by utilizing forward and option hedging strategies.
  • Banks can provide analyst forecasts and technical analytics for most currencies.

THE FINANCING

Utilizing your financial institution can help with the cash flow needs created by exporting. This cash flow crunch is lessened by utilizing a revolving line of credit that can be backed by the Export Import Bank of the United States or the Small Business Administration. With the guarantee of EXIM or the SBA, a bank can utilize more assets to lend against, including foreign accounts receivable and inventory.

THE BANK PARTNER

One of the keys to exploring exporting opportunities is to find the right partner. An excellent international banking partner will know your product, understand your risk tolerance and be invested in your success. Your banking partner will also be able to provide a custom educational program for frontline employees and find the custom fit solution to maximize profits while attempting to minimize risk.

About the author

Matthew Burke

Matthew Burke

Senior Advisor, Global Banking
Matt Burke, at First National Bank is in charge of building relationships with new and existing clients in Central Nebraska who are searching for solutions to their global payment and international trade needs.