Last Updated May 2, 2007 7:29 PM EDT
Exporting products for sale outside the U.S. can be a rewarding way for your small firm to develop and grow. At the same time, it's important to understand the challenges and risks, which are very different from those in the domestic market.
Small firms export in order to increase sales and profit, reduce their reliance on the domestic market, and explore the potential of foreign customer bases, among other reasons. Some reasons arise from the personal aims of the owner and can include a desire for a new challenge, an interest in greater prestige and credibility for the business, and seeking added sources of wealth.
Exporting should be evaluated in the wider context of your strategic business plan. The potential rewards of exporting are significant, but the investment required is substantial, so beware of overstretching your resources. If you find that you need financing to begin exporting, consider carefully whether the results will warrant the risk of taking on added financial responsibility. Here are other factors to consider in deciding whether your business is fit for exporting:
- your knowledge of the foreign market you wish to enter
- your capacity to produce, distribute, and sell in the foreign market
- your flexibility to meet changing needs in that market
- management, staffing, and skills available in your business.
Successful exporters have demonstrated their commitment to exporting by carrying out several preparatory steps. You can increase your potential for success by emulating their approach:
- Carry out thorough research and planning.
- Take time to learn about the culture, language, and other special features of the countries where you plan to export.
- Visit your targeted marketplace to confirm that an adequate market exists for your products.
- Make business contacts and develop relationships within your target market.
- Develop an eye for detail in completing export documentation and procedures.
- Maintain a commitment to quality in your products and operations.
Beginning exporters can run into problems that may not appear to be directly related to exporting. Also, a plunge into exporting can reveal flaws in a business operation.
- Staff. Growing firms can find it hard to recruit staff with the right knowledge and experience. Recognize your staff limitations and be prepared to use appropriate external advisers—for research, strategic guidance, and as a sounding board for problems.
- Cost. Beginning exporters often underestimate the cost of breaking into foreign markets. In your planning, consider the costs of production, export packing, domestic and overseas transportation and handling, and various types of insurance. You must also be prepared for customs duties payable overseas, freight forwarders' charges, direct office costs, overseas agents' charges, sales commissions, and advertising. You will need to make an initial investment to cover the costs of research, developing markets, and expenses incurred before sales get under way. You may need to obtain financing, which of course entails costs as well.
- Pricing. Once you've confirmed that there is a potential foreign market for your product, you will need to determine if foreign customers are willing to pay a product price that will meet your needs for profitability.
- Fulfilling orders. Accepting substantial new business from foreign markets without thinking through the implications can be risky. Payment can take longer for exports, which can cause disastrous cash flow problems. You must have inventory available for timely delivery while you continue to manage your inventory costs. If you cannot administer and fulfill orders promptly, you risk losing customers.
- Packing and shipping. Exporters must ensure that goods reach their destination undamaged at the most economical cost. There are varying regulations to follow for export packaging and labeling. Also, you must be clear in your contract with your buyers as to when your responsibility for the goods ends and theirs begins.
Beginning exporters can find a great deal of advice, information, and support from government agencies and business organizations, much of it free or subsidized. Two examples are the U.S. Government Export Portal (especially its helpful web site) and the Manufacturing Extension Partnership, a nationwide network of not-for-profit centers that work with U.S. manufacturers on exporting and other issues.
Freight forwarders offer comprehensive services, including door-to-door transport or arranging transport of goods overseas and producing and handling the extensive documentation often required for export. It may be cost effective for you to hire a freight forwarder to handle all of these responsibilities. Freight forwarders can be found in most metropolitan areas and are usually listed in business directories under "freight" or "transportation." In addition, the National Customs Brokers and Forwarders Association of America can provide exporters with information about their members (see contact information below).
Various types of export insurance will help you manage most risks involved, such as the risk of product damage during transport. For other risks, consider these precautions:
- Make sure your contract has clear terms concerning payment and that you have a secure method of receiving payment (normally through a bank) to reduce your risk of a buyer not paying.
- Consult with your banker on hedging mechanisms to protect yourself should the exchange rate between U.S. currency and the buyer's currency change significantly between making a contract and fulfilling it.
If you export to a politically unstable country, your business may be harmed by disruption of commerce or loss of value of the currency. You can obtain information about political and economic risk in foreign countries from the U.S. State Department, the Office of the U.S. Trade Representative, or U.S. embassies or consulates in countries where you want to export.
- Interest rate risks can be especially relevant when there is a long time between the initial planning work and final payment for the product. In such cases, make sure you include the cost of money in your business calculations.
- You can reduce risks overall by entering exporting in small and manageable steps and by hiring experienced export professionals to help you.
Exporting places a new set of pressures on a business. It is essential that your business is running efficiently before taking on the added complications of exporting.
Take full advantage of the free advice and information available from government agencies and business organizations.
Obtaining training from export experts, for both you and your employees, is essential to success. Training will enable your team to make informed decisions about which foreign markets to investigate and how to go about exporting to them.
Cook, Thomas A., Rennie Alston, and Kelly Raia.
Nelson, Carl A.
International Chamber of Commerce: www.iccwbo.org
National Customs Brokers and Forwarders Association of America: www.ncbfaa.org
Office of the U.S. Trade Representative: www.ustr.gov
U.S. Department of Commerce: www.commerce.gov
U.S. Government Export Portal: www.export.gov
U.S. International Trade Administration: www.ita.doc.gov