Understanding Red Tape When Transitioning From Domestic to International Trade

By Alex Vavilov, Chief Commercial Officer for Stenn International

Statistics suggest that around 65% of new businesses fail during their first ten years, which highlights the importance of growth planning, particularly among those companies navigating the challenging move into international markets.

With this in mind, Alex Vavilov, Chief Commercial Officer for Stenn International, explores the top four considerations for a successful transition from domestic to international trade.

Understanding Tariffs

A tariff is essentially a tax on goods and services imposed by one country on another. These taxes are typically imposed to promote domestic businesses by reducing demand for foreign goods. While this can be beneficial for local firms, tariffs can pose a challenge for a company looking to expand its trade overseas.

Tariffs will have to be factored into any international trading because they increase a company’s costs and decrease its profits. This is likely to have a greater impact on smaller businesses because they have lower margins and may not be able to absorb the additional costs. Small businesses may also have fewer resources to dedicate to finding new suppliers.

The global health pandemic has also emphasised the need for businesses to mitigate the effects of unexpected events. One of the best ways to manage this risk is to maintain an adequate reservoir of capital. Using invoice factoring is one way to ensure that your business has capital available when necessary. A business with sufficient resources can weather financial storms more effectively.

Cultural Challenges

Analysing your business competitors effectively is crucial when preparing to target new markets. It provides a greater understanding of the marketplace and allows you to take advantage of areas that your competitors have not.

Furthermore, understanding any differences in regional and cultural regulations can provide insight into standard practices there and indicate those which may help, or hinder, your business operations.

Failing to adapt to local markets is a mistake which many large businesses have made. Retailers such as Tesco, Starbucks and Walmart have all failed in some international markets.

Starbucks, which benefits from incredible popularity in the United States, has attempted numerous international expansions with varying degrees of success. In Australia, for example, Starbucks’ expansion was a failure and resulted in the closure of two-thirds of its stores in 2008. There are a few reasons for this, the first being that Australia has many independent coffee retailers and local residents there already enjoy a varied coffee culture. But Starbucks overlooked this and failed to adapt its menu and offer locals something new. As such, customers continued to support existing retailers.

The importance of understanding cultural nuances was also shown by Walmart’s failure in Germany. One of the factors mentioned for Walmart’s failure was its inability to understand German customers. Chatty greeters and staff who pack groceries may be common in the US, but this behaviour proved off-putting to German customers.

Researching your preferred markets to discover the opportunities available to you is the key to a successful transition into international trade. Consider employing local marketing firms to give you a better understanding of local customers, and outsourcing certain tasks, such as payroll, to ensure that local laws and regulations are adhered to.

Legal and Logistical Considerations

Brexit has had implications for the export of goods, and those looking to trade overseas need to have a thorough understanding of changing international trade agreements.

The UK-EU Trade and Cooperation Agreement was one result of Brexit and took effect from 31 December 2020. This trade agreement means that UK goods no longer benefit from free movement and those UK producers who wish to serve both the UK and the EU must meet both sets of standards and regulations. There are also more customs formalities and checks on UK goods entering the EU, resulting in delays.

It is important to understand the impact that these new regulations will have on future business plans. The Institute of Directors conducted a study six months after the agreement was implemented and found that 17% of businesses that previously traded with the EU stopped, either temporarily or permanently, from the start of 2021.

Businesses also need to be aware of the wider implications for supply chains and workforces. The workforce in the UK has already been affected by labour shortages, as evidenced by the HGV driver shortage. However, on a wider scale there has been increasing concern about labour shortages within the EU as a whole. One report found that the pandemic had caused rising unemployment in some sectors but labour shortages in others such as Healthcare.

While red tape cannot be removed, employers should try to ensure a consistent workforce by offering permanent contracts to workers where possible.

Supply chains worldwide have been disrupted by the pandemic and many industries have been affected. Diversifying your suppliers and manufacturers can protect you from the lesser of these disruptions. To guard against larger disruptions, it’s prudent to maintain good cash-flow forecasting. This allows you to plan for the unexpected and gives you the capital necessary to purchase last-minute inventory.

Export Receivables Financing

Invoice financing (also called ‘invoice factoring’) is short-term financing which a business can access using its unpaid invoices as collateral. It is often easier for small, relatively new businesses to secure invoice financing compared with other forms of funding.

Invoice financing allow businesses to access most of the money due on an invoice within 48 hours of documents being signed. This provides companies with more predictable cash flow because they know that the invoice is guaranteed to be paid. Over the longer term, strategic financing like this can allow businesses to take on bigger projects, like expanding into international trade, without stretching cash flow too thin.

It also enables a business to offer a line of credit to its loyal customers and to pay its own suppliers on time, thereby reducing the chance of supply chain problems.

For companies with ambitions to expand, having fast, additional capital available to pay new suppliers upfront will be a great benefit. For those starting to trade in countries where longer repayment times are the norm, invoice financing can provide ready funds instead of waiting up to 120 days for those international invoices to be repaid.