Today’s economy has made it easier than ever for companies of all sizes to reach overseas buyers and to expand their supply chains beyond the U.S. Advances in technology, especially the Internet, have increased accessibility to markets and allowed for fast, affordable movement of information, goods and money.
Businesses are viewing global trade as a key strategy for increased profits and sustained growth. In fact, according to the 2016 SunTrust Bank Business Pulse survey, more than 23 percent plan to expand into international markets within the next five years.
But doing business globally is more complex than trading domestically. Every country has its own cultural traits, government regulations and business conventions. Using available resources and finding the right partners - both domestically and locally – is vital to success.
Practical financial tools
Businesses that engage in global trade can use a set of risk management tools to balance their ability to compete globally with their need to protect profits and maximize working capital.
Foreign Exchange Services (FX), also called Currency Risk Management, can provide importers with effective ways to reduce the risks of currency shifts on foreign costs and payables. Even when a company is invoiced or pays in U.S. dollars, there is still a conversion taking place on the other end of the transaction. SunTrust works with its clients to gain visibility and control over this conversion process and this usually leads to savings, which can be material given the current volatile environment.
Secure payment solutions
- Documentary collection is a process that assures prompt payment to your supplier's bank, once documents arrive. The supplier presents a draft or bill of exchange to its bank, along with the shipping documentation. The documentation is sent to your company's bank, which then makes payment or provides assurance of payment at a specified future date. The documents then can be released to you, and your company can take possession of the merchandise. This arrangement gives more protection than open account terms and exposes your company to less risk than a clean payment in advance.
- Letters of credit are a universally-accepted form of payment which commits a bank to honor drafts and documents that are presented in conformity with stated terms and conditions. The bank substitutes its own creditworthiness and reputation for that of the importer, obligating itself to pay the exporter as long as the stipulated documents are presented within a prescribed period of time and all terms and conditions of the letter of credit have been met. Because your bank is involved in this process, as an exporter, you gain additional security that you will be paid. While a letter of credit can’t protect fully against the risk of fraud, it provides important benefits to both you and your supplier.
Supply chain finance
- Supply Chain Finance is a process where financial institutions finance imported goods as they move from country of origin to the U.S. As importers find it necessary to improve cash flow by extending payment terms to their suppliers, the financial burden is shifted to the suppliers, who in most cases have little or no access to competitive financing in their local markets. However, this financing lessens the burden by offering the supplier U.S.-based interest rates based on the creditworthiness of the importer, which is usually a very large corporate entity. For small and mid-sized businesses, the Supply Chain Finance solution continues to evolve. The biggest challenge is the onboarding process with foreign suppliers as many are not comfortable working with lenders. Letters of Credit have been the norm, particularly in Asia, for a very long time. Getting suppliers comfortable with a new process will be critical to expanding supply chain finance to the small and mid-sized market.
Overall, the major benefits include the accelerated collection of accounts receivable for participating suppliers and the extension of accounts payable for the corporate buyer as both the supplier and buyer of goods are able to improve their working capital position.
Tap Expert and Third Party Resources
To succeed, invest the time to learn all you can about global trade and assemble a team of experts including attorneys, financial partners, freight forwarders, customs brokers and export credit insurance specialists. By integrating these experts into your business operations, they can help simplify the complexity of global trade and jumpstart global initiatives by providing intelligence on markets, customers, suppliers, and costs, allowing you to move quickly to take advantage of opportunities. Businesses should also use other resources, such as national, state and local programs.
At SunTrust, we have deep expertise working with companies to expand international trade – both importing and exporting. We help clients evaluate the risks and offer solutions to avoid the pitfalls while growing their international business.
Questions to ask about your currency risk management strategy
- Are we taking full advantage of the savings made possible by paying in local currency?
- How will a strong or weak dollar affect our position against the competition?
- How will a strong or weak dollar impact our strategic business plans?
- Are we hedging our foreign exchange (FX) exposure?
- Will our FX hedging strategies remain effective in a changing market environment?
- Do we have adequate capacity for our foreign exchange transaction activities?
Susanne Keough manages SunTrust Bank’s trade finance and trade banking business as the head of the Global Trade Solutions Department. In this capacity, she is responsible for SunTrust’s trade finance sales, compliance and portfolio management areas.