Expanding your business overseas can be extremely rewarding; however, it doesn’t come without its fair share of risks. In this blog, we provide an overview of the different types of risk your international business may be exposed to, plus how to mitigate them for smoother operations and transactions.
Key risk factors to consider in international business transactions
Transaction risk
What is transaction risk? Well, any business making or receiving overseas payments is exposed to this type of risk. It refers to how exposed a business is to a range of factors that directly or indirectly impact the funds received on a transaction or deal.
Whether you’re running an enterprise-level business or a large corporation, the transaction risks associated with international trade can negatively impact your profits, so it's important to have risk management strategies in place. A few examples of transaction risk include foreign exchange (FX) risk, commodity risk, and interest rate risk. Let’s delve deeper into some of these.
Foreign Exchange (FX) risk
FX risk refers to how volatility in the currency market can impact business. The FX market is extremely unpredictable, with currencies fluctuating 24 hours each day, five days a week. For businesses trading internationally, the amount you pay or receive on overseas transactions can also fluctuate (sometimes massively, impacting your bottom line), so having well-informed hedging strategies in place is essential.
Some FX hedging strategies include:
- Forward contracts
This customised contract between two parties enables them to buy or sell a currency asset at a specified price on a future date. - Currency options
A currency option gives buyers the right (but not the obligation) to buy or sell currencies at a specified exchange rate. This is usually within a specified time.
When it comes to FX risk, 3S Money's expert FX desk has got clients covered and is on hand to provide assistance. Get started with a 3S Money account today.
Political risk
Political risk refers to the potential instability caused by any changing laws, policies and regulations in a foreign country that could harm your business operations and investments. This includes things like:
- Trade barriers
- Contract termination
- Asset confiscation
Hedging against political can be done by:
- Investing in political risk insurance.
- Diversifying your global presence – for example, a local IBAN with 3S Money can help you scale in new global markets.
- Building good relationships with local authorities and partners.
Cybersecurity risk
This type of risk involves the potential theft of sensitive data or disruption to your business due to cyberattacks. In an increasingly digital world, all businesses should mitigate cybersecurity risks. This can be done via:
- Investing in cybersecurity measures like encryption, firewalls and employee training to safeguard your data
- Developing effective data backup and recovery plans prior to any cyber incidents
Commercial Risk
Commercial risk refers specifically to business risk factors, such as:
- Competition
- Market volatility
- Any economic conditions that can impact business
To hedge against this type of risk, you can:
- Conduct thorough market research and analysis to understand the ins and outs and demand of your target market.
- Diversify your products and services by offering a range to your clients.
- Create contingency plans so that you can respond quickly to change.
We’ve covered the key risk factors, like transaction risk, FX risk and political risk, to name a few, now let’s delve a little deeper into economic risk and how best to manage it.
Managing economic risks in international business: the guidelines
Managing economic risks is crucial for the success of your international business. Here are some strategies you can implement to safeguard your business against economic uncertainties:
Use a reliable B2B money transfer service
Choosing a reliable business-to-business (B2B) money transfer service is vital for seamless international transactions. You should aim to look for services that are regulated, with low fees to minimise financial exposure.
3S Money is a B2B international payment provider that is FCA, DFSA and CSSF regulated. Not only this, but it offers competitive exchange rates, which can help minimise financial exposure.
Plan for fiscal crises
Sometimes, the only predictable thing about the economy is that it's unpredictable. In the event of economic downturns or financial crises, having a financial contingency plan in place is essential. Think about the Covid-19 pandemic for example, and how it impacted businesses across the globe.
It’s important to maintain cash reserves, reduce unnecessary expenses, and be prepared to adjust your business strategy accordingly.
Ensure compliance with local regulations and legislation
Finally, following local regulations and legislation is key when it comes to mitigating economic risks. You'll wait to regularly update your knowledge of local laws and maintain proper legal counsel to avoid costly penalties and disruptions.
Conclusion
International business is full of opportunities and potential rewards, but it also comes with various risks. By understanding these risks and implementing appropriate hedging strategies, your business can navigate the global market with confidence and resilience.
Manage your transaction risks with a 3S Money account
Being a global payment provider, 3S Money knows just how important it is to mitigate risk.
Our clients can be confident knowing that:
Our clients can be confident knowing that:
- Payments are protected by international regulatory bodies
- Dedicated client managers are on hand offering a consultative approach to your business banking needs.
Get started with your application today and be pre-approved for an account in less than fifteen minutes.
