SMEs and global trade: preventing financial risks
SMEs and international trade: risk management and financial impacts
In a globalized world, the opportunities offered to SMEs by international trade are numerous, an invitation to develop their business beyond borders. However, this expansion comes with considerable challenges and exposure to various risks that, if not properly anticipated and managed, can compromise the financial health of the company.
SMEs and international trade: a winning combination?
For SMEs, international trade represents a significant growth lever. In 2021, French exports reached 758 billion euros, placing France 6th in the world ranking of exporters of goods and services. For a modest-sized structure, international expansion allows it to diversify its clientele, increase its turnover, and reduce its dependence on a single market.
However, this openness also exposes companies to common risks of international trade for SMEs, which differ significantly from those encountered in the domestic market. Mastering these risks is essential to maintain optimal financial performance in international transactions.
The main risks of international trade for SMEs
Currency exchange risk: a major issue for profitability
Currency fluctuations are one of the common risks of international trade for SMEs. When a company exports or imports goods, the time between the conclusion of the contract and payment can lead to exchange rate variations that directly affect the profit margin.
To reduce this risk, several strategies can be implemented:
- Invoicing in a single currency (euro or dollar)
- Subscribing to forward exchange contracts
- Using local and multi-currency accounts to optimize transactions
These solutions help stabilize margins and cash flow, while ensuring better financial predictability.
Credit and non-payment risk
For an SME engaged in international trade, the risk of not being paid is considerably higher than in domestic transactions. This risk can result from several factors:
- The customer's financial default
- Failure to meet contractual commitments
- Political or economic instabilities in the destination country
The financial impact of non-payment can be particularly serious for an SME whose cash flow is often more limited than that of a large group. To protect against this risk, companies can use payment guarantees that offer robust protection for both the buyer and the seller.
Logistical and transport challenges
The international transport of goods exposes SMEs to specific risks:
- Damage or loss of goods
- Significant delivery delays
- Unexpected logistical costs
- Customs and regulatory issues
These incidents can have a direct financial impact on the company's performance, not only in terms of additional costs but also of reputation with customers. Optimizing international payments can help reduce friction related to the financial aspects of transport.
Regulatory and political risks
SMEs embarking on international trade must also face varied regulatory and political environments:
- Changes in customs barriers
- Changes in local legislation
- Political or economic instabilities
- Restrictions on capital transfers
The complexity and volatility of these regulatory frameworks can generate unexpected additional costs and significantly affect the profitability of international operations.
The financial impact of international trade risks
Exposure to international risks has direct repercussions on several aspects of SME financial performance:
Impact on margin and profitability
Common risks of international trade for SMEs can erode margins in several ways:
- Unfavorable fluctuations in exchange rates
- Unexpected costs related to trade barriers
- Additional logistical costs
- Provisions for doubtful debts
Such risks can reduce the profit margin on international transactions if no preventive measures are put in place.
Consequences on working capital requirement
International trade generally involves longer delays between production and payment, which increases the working capital requirement (WCR) of SMEs. Among the main causes, we can cite longer payment cycles, additional storage costs, financial guarantees to be constituted, or cash advances for customs and transport costs.
To manage this financial impact, using short-term financing solutions can be crucial.
Volatility of financial results
SME involvement in international trade can also lead to greater volatility in financial results, which complicates financial planning and can worry banking partners and investors.
Risk management strategies to optimize financial performance
The importance of a thorough preliminary analysis
Before embarking on international trade, SMEs must conduct a detailed analysis of target markets, including:
- Assessment of political and economic stability
- Study of local regulations and trade barriers
- Analysis of the solvency of potential customers
- Understanding of local business practices
This step is crucial to properly assess risks and their potential financial impact.
Suitable financial solutions
Several financial solutions can effectively manage the common risks of international trade for SMEs:
- Credit insurance: It covers the risk of non-payment by foreign customers and can be supplemented by a payment guarantee that further secures transactions.
- Currency hedging instruments: These financial products protect against unfavorable fluctuations in exchange rates and stabilize margins. The use of multi-currency accounts also facilitates the management of foreign currency flows.
- Suitable financing solutions: Short-term financing helps support the increased working capital requirement related to international operations.
- Optimization of payment methods: International payments can be streamlined to reduce costs and speed up processing times.
Continuous adaptation of the international strategy
SMEs in international trade must remain flexible and constantly adapt their strategy to changes in the global context. This agility allows them to turn certain risks into opportunities and maintain optimal financial performance.
International trade offers SMEs considerable growth prospects but also exposes them to specific risks with a potentially significant financial impact. Proactive management of these risks, combined with the use of suitable financial tools such as payment guarantees, short-term financing solutions, multi-currency accounts, and optimization of international payments, allows for securing transactions and preserving the financial performance of the company.
