How To Overcome 5 Common Financial Risks When Expanding Your Business to Foreign Markets
By Alana Downer | Expanding your business to foreign markets is, on the surface, very exciting. More markets mean more potential profit and an opportunity to expand suggests that you’re doing something right.
On the other hand, this opportunity comes with risk. Dealing with large sums of money overseas creates the potential for even more costly missteps. Many companies have already made these missteps, and learning from their mistakes can help you save money and put you ahead in the game.
Trusting the wrong people with your money
Language barriers, cultural differences, and an ocean’s worth of distance between you and the people you’ve put in charge can create costly miscommunications. When you’re trusting someone to represent your business overseas, you need to know who this person is. Even if they’re only selling the products, you need to be entirely sure that they’re going to operate the way you need them to operate. If not, your expansion will wind up costing you.
It’s logistically impossible for you to be at both your home headquarters and your regional headquarters at the same time. You need to be sure you have the second best person heading up your international team. Start very small as you’re developing relationships with people in different countries. The less money or product you have on the line, the lower the risk becomes.
Over time, as you get to know the other parties, slowly increase the amount of money or goods you’re dealing with. You’ll be giving yourself a lot more time to spot risks, and if they can’t be fixed, you’ll be able to find and vet new people to work with.
Being negatively impacted by exchange rates
A deal you made for $100,000 in your currency may come up payable at $75,000 in your currency if exchange rates change in the meantime. This is a significant loss that you’re locked into if you didn’t take any preventative measures.
Many people who make overseas business deals utilize currency hedging methods to mitigate or prevent the loss of money. One of the simplest ways to hedge currency is through forwarding contracts that lock in a specific rate for an exchange of currency. Values may change between the date a deal was made and the time payment is due, but the exact conversion rate at the moment the deal was made is locked in. This doesn’t benefit you if the exchange rate changes in your favor, but it also prevents you from losing money if things take a turn for the worst.
Spending more than you need to
If you’re very ambitious, you probably have some big ideas regarding how your international expansion will go. You’re looking at buildings and warehouses. You’re investigating how to hire new staff and distribute your products. It’s overall a costly process, and that’s a huge risk if you’re not sure how you’re going to perform in that new market.
Rather than putting the cart in front of the horse, keep things simple. Instead, find a distributor for your products. You can make the marketing and sale of your problem someone else’s burden. While you likely won’t make as much money as you would have by keeping it a solo effort, you’re also taking on a lot less risk. You’re still profiting at the end of the day, but you don’t have to assume much responsibility.
See how things go for a while before you make expensive and risky expansion plans. If your product doesn’t work in that market, you’ll know before you’ve had a whole new building erected.
Flopping right before your launch
Starbucks is the most iconic coffee brand in the world. Everyone associates a particular shade of emerald green and the company’s “siren” mascot with coffee. There’s one on every corner in almost every developed country in the world. When Starbucks decided to expand into Australia, they didn’t even think twice, but they probably should have.
Australia neither needed nor wanted Starbucks. They have a huge coffee culture, and they grow most of it locally. Australians were accustomed to the boutique coffee and smaller mom-and-pop shops they’d been going to forever, and Starbucks felt obnoxious to them. Their coffee wasn't broken, so there was no need to fix it.
The moral of the story is that you need to do as much market research as possible. Make sure the foreign market you’re expanding into has a need and a want for you. If you’re not primed to succeed, you’re going to lose a lot of money.
Getting caught in a legal battle
Since every country has its own specific rules about the way businesses need to be run, and money needs to be handled, it can become exceedingly complicated to navigate foreign markets. If you find yourself in legal trouble for misunderstanding requirements you weren’t subject to back home, you’re in for a costly battle. Always keep local business lawyers on retainer to assure your compliance in every market you decide to branch into.
You can’t have a reward without any risk. Some risk is always necessary to run a successful business. Just be sure the risks you’re taking are calculated and measured for your success.
About the Author
As an experienced financial advisor and content creator, Alana Downer is often found online, participating in numerous financial discussions, and helping both businesses and individuals create and manage their wealth and make smart money decisions. Currently, Alana is writing on behalf of Learn to Trade, an educational resource for traders and investors. Feel free to reach out to her on @alanadownerLTT.