10 tips for doing business overseas
From managing currency fluctuations to hiring employees, here are some important things to consider when expanding a small business abroad.
According to the U.S. Chamber of Commerce, 95% of the world's customers and 80% of the world's purchasing power are outside the United States.1 For certain small business owners, this presents a tremendous incentive to expand their businesses abroad.
"It's imperative for U.S. businesses to think about going overseas," says Charlie Skuba, a professor of practice in international business at Georgetown University's McDonough School of Business. "That's where the money is going to be. With the growing middle class in large emerging markets, more and more customers will have the affluence and ability to purchase U.S. goods and services overseas."
However, doing business abroad can come with its share of challenges, which is why it's important to plan strategically. Prepare yourself for a successful international expansion with these tips:
1. Expand mindfully.
All too often, companies expand internationally without doing their homework and wind up putting resources in the wrong places. To avoid this, take a proactive and strategic approach to business growth when pursuing a foreign market.
"See which markets have the highest potential and take into account the size of the market, the level of competitiveness in the market and your access to distribution channels," says Helena Yli-Renko, director of the Lloyd Greif Center for Entrepreneurial Studies at the USC Marshall School of Business.
2. Consider conducting business in foreign currency.
If you're conducting business overseas, it's important to identify the currency preferences of your industry.
"Research the norms in your industry before negotiating any contracts or setting product prices," says Amy Henry, Managing Director, Foreign Exchange Services at Wells Fargo Bank. "In some circumstances, using the local currency may provide you a competitive advantage. In other cases, such as commodities, buyers and sellers may prefer to conduct business in U.S. dollars."
When choosing a currency to use, it's helpful to consider what prospective customers prefer and what competitors use. For instance, Henry explains that if you insist on billing in U.S. dollars, yet your customers prefer their local currency, you run the risk of losing business to a competitor who appeals to local preferences.
3. Consider the impact of currency fluctuations.
While working in a local currency can offer many benefits, it also has its challenges, such as the idiosyncrasies of fluctuating foreign exchange rates.
"Currency values move constantly. It's important to be aware that the Euro could be valued at one price today and a very different price tomorrow," Henry says.
Henry suggests a few strategies to protect your bottom line against these fluctuations. The first is hedging, which allows companies to lock in an exchange rate for a future transaction or, in some cases, take advantage of a more favorable rate. Another strategy is to reduce the time between your invoice and the actual transaction settlement. Currencies are less likely to fluctuate widely over a shorter time frame, so condensing your transaction cycle may allow you to better predict the U.S. dollar value of the transaction.
4. Initiate payments in the exact amount and currency denominated on your invoice.
If you receive an invoice denominated in a foreign currency amount, you will want to pay that exact amount in local currency. If instead you choose to estimate the U.S. dollar value of the foreign currency invoice, and initiate a wire in U.S. dollars, inevitably the result will be an overpayment or underpayment. Paying the precise local currency amount listed on the invoice by wiring funds in the foreign currency will ensure your vendor is paid in full, and that no money is lost by overpaying for a purchase.
"If an overseas company is billing you in U.S. dollars, there's a good chance they are adding into their invoice a cushion of a few percentage points, to protect against potential currency fluctuations as they wait for the payment to arrive," Henry says. "This situation presents an opportunity to leverage the local currency as a negotiating tactic. For example, if the customer is in London, you could ask, 'Would you offer a discount if I pay in British pounds?'"
5. Evaluate the need for an international bank account.
Establishing a bank account in another country can be expensive and time-consuming. If you are selling overseas in a local currency, you likely do not need an actual international bank account. Often it can be more cost-effective to simply provide currency-specific wire instructions so that each client may pay in their local currency. In general, if you only have foreign currency receivables, this option can help you avoid the cumbersome process and expense of opening an account in another country, Henry says.
In cases where you have payables and receivables in the same foreign currency, a foreign currency account could make good sense. Foreign currency accounts (also known as, multi-currency accounts (MCAs)2) can help minimize foreign exchange conversions and streamline accounting by enabling a company to hold foreign currency.
6. Be aware of cultural biases.
Research customs and etiquette of the international customers you'll serve, and try to adapt your behavior and mannerisms to the cues around you. According to Skuba, American businesspeople tend to communicate in a fast, straightforward manner, while other cultures may take a more reserved approach.
"Japanese culture is a classic example, where there can be more of an emphasis on getting back to you later," he says. "You present an idea to them, and they may not want to talk about it in the meeting. It doesn't mean their receptivity is bad, but they would like to talk about it in private."
7. Hire local employees or consultants.
One way to embrace the local culture is to hire local managers and integrate them with your management team. Someone who knows the culture already can provide invaluable insight to a team of employees. This is especially helpful if you're doing business in a non-English speaking market. For small companies that can't add to the payroll, consider hiring a temporary local consultant or contractor to help the business initially adapt to the local market.
8. Tap into your network.
If you don't plan on setting up an office overseas or hiring foreign employees, you can also acquire local knowledge through business partners such as suppliers, distributors, or investors that have a presence in the region.
"Really leverage those external sources of knowledge," Yli-Renko says. "Ask them what are the customers' needs in that marketplace, and how are they different from domestic customers? What's happening in terms of competition? What companies are offering similar things in that market? Who are their customers? What are the main distribution channels and how can you get access to them?"
9. Have a local attorney review contracts.
Whether you're setting up a franchise, signing a licensing agreement, or creating a joint venture, consider using a local attorney who understands the intricacies of that country's laws and business practices.
"There are new laws being created in some developing markets continually, so you've got to be aware of your local laws and how they affect your contracts," Skuba says. "A good contract should, at a minimum, define how you arbitrate disputes without going to expensive lawsuits, define the scope and terms of the agreement, define the reporting relationship, define who keeps the books and who has access to the books."
10. Don't neglect domestic operations.
According to Yli-Renko, one of the top reasons some multinational companies fail is that they lose sight of what's happening in the home market. It's important to develop an international strategy that enhances the company's core strategy rather than distracting from the company's domestic activities.
"The domestic customers are going to provide very important stability and a buffer when the company encounters turbulence and uncertainty overseas," Yli-Renko says.
Maintain the right number of key players focused on the home market, so you're not spending all your resources abroad.
Whether you're planning to export goods, outsource manufacturing, or set up an international office, it's important to keep these tips in mind before expanding abroad. By considering factors like currency fluctuations and local customs, you can better prepare yourself for conducting business overseas, and before you know it, experience the benefits of reaching an international customer base.
2Balances held offshore, including multi-currency accounts and foreign deposits, are not FDIC-insured, may lose value, and are not guaranteed.