From political to financial upheaval, Canadian companies doing business abroad have found reason to be cautious about the uncertainties they can face. But with slowing growth in this part of the world, some companies are turning to the global market, along with its attendant risks.
Urs Uhlmann, chief executive officer of Global Corporate, Zurich Canada, is responsible for the Swiss insurance company's large-risk business in Canada. Zurich has operations in more than 170 countries worldwide. As a member of the global insurer's management team, Mr. Uhlmann assists Canadian insurance brokers, risk managers and chief financial officers in understanding how to protect clients from risks associated with doing commerce internationally. "Zurich's global network gives our customers access to on-the-ground insights into the local markets where they want to do business," Mr. Uhlmann says. Here he shares his top five tips for how Canadian exporters can avoid the pitfalls of working abroad:
1) Know whom you're doing business with.
Do your research on the buyer. Doing business in emerging markets usually means you will face less transparency when it comes to evaluating your buyer. It is imperative that you get reliable financial information through reviewing audited financial statements and credit reports where possible, as well as information on your buyer's relevant experience, management practices, reputation, political affiliations and size or position in their local or regional sector or economy. Operating cash flow, profitability and debt or leverage obligations are examples of financial metrics that may provide initial comfort but it is equally as important to evaluate your buyer's past payment performance and whether it has had any disputes with local governing bodies that could expose you to unforeseen risks in the future.
Urs Uhlmann, chief executive officer of Global Corporate, Zurich Canada: 'The outbreak of political violence in the Middle East and Ukraine are examples of how unpredictable political risk events can be and how quickly a stable country or region can descend into chaos.' (Zurich)
2) Understand the political climate.
Faced with increasing pressure to grow revenue and market share, exporters are turning to emerging markets to find new opportunities. With these new opportunities come a unique set of risks posed by operating in an environment of weak governing institutions, poor regulations and underdeveloped legal systems. It is crucial for exporters to understand how these risks can affect them and to develop a strategy to protect their balance sheets against catastrophic losses. The outbreak of political violence in the Middle East and Ukraine are examples of how unpredictable political risk events can be and how quickly a stable country or region can descend into chaos.
3) Consult with experts.
If you are new to a country or region, consult with a credit and political risk broker to help you identify the risks and to develop an appropriate business plan to protect your company against losses.
Export credit agencies (ECAs) are government agencies that are dedicated to facilitating and expanding domestic exports by providing financing, political risk and trade credit insurance and consultation services to businesses looking to expand into new and challenging markets. Export Development Canada is Canada's ECA and can provide consultation in developing an export strategy, identifying new export opportunities, addressing global trade regulation and managing foreign-exchange risk.
In addition to ECAs, there is a robust private-sector credit and political risk insurance market here in Canada. There are benefits to working with an ECA and the private insurance market. An exporter should be aware of what both can offer and decide which can best meet its needs.
4) Make sure you get paid – through a letter of credit.
A letter of credit (LC) is an instrument issued by a bank to guarantee payments to a seller on behalf of a buyer for a specific trade transaction. The LC is used to facilitate a trade between a buyer and seller where the seller needs additional security to agree to the sale. By having the bank issue an LC on behalf of the buyer, the seller effectively transfers the non-payment risk from the buyer to the issuing bank.
5) Make sure you get paid – by insuring your receivables.
A trade credit insurance policy is a risk mitigation tool offered by the private insurance market or an ECA that covers the exporter's accounts receivable against a non-payment due to an insolvency, protracted default or political risks.
Responses have been edited and condensed.
Editor's note: Mr. Uhlmann is chief executive officer of Global Corporate, Zurich Canada. A previous version of the story had an incorrect title. This is the corrected version.