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Know your trading partners

  • Article

Whether trading at home or overseas, it is vital to find out as much as possible about potential trading partners.

When companies start trading internationally they need to build up a good relationship with their overseas trading partner. Therefore doing as much research as possible into trading partners can avoid any awkward situations arising later, as well as more generally fostering a good commercial relationship.

Minimum due diligence

Companies tend to experience difficulty trading overseas when they behave differently from how they would in their domestic market. Typically when they receive their first order from a local customer, they will do the necessary background research. Bank and trade credit references will probably be taken up and the new customer may well be asked for prepayment against a proforma invoice for the first order.

As a minimum, the same standards of due diligence should be applied when doing business with customers overseas. Apart from any credit risk inherent in lax research, there is a reputational risk if a company (even unwittingly) forms undesirable trading relationships.

Country risk

Due diligence is doubly important if the customer concerned is in a new and unfamiliar market. This is because an overseas trading partner has no control over any of the risks associated with their country. When dealing with a new overseas customer, an exporter is essentially assuming the risk of both the customer and their country.

It is not uncommon to find that countries that promise to deliver the most growth may also have economic volatility and particularly unfamiliar political and business cultures.

Wars and civil disturbance may be red flags, but other warning signs may be as subtle as manipulation of foreign exchange rates, changes to local banking regulations and restrictions on inward investment.

This due diligence applies equally on the supply side. Increasing globalisation has raised awareness of supply chain vulnerabilities. Companies can no longer just focus upon contingency plans relating to their own operations. Rather, they need to:

  • Have a direct interest in their suppliers' ability to fulfil their orders
  • Ensure that suppliers have sufficiently robust business recovery arrangements in place
  • Consider how any country risks might impact their suppliers' ability to deliver.

Trading at a distance

It is essential with any business relationship that there is mutual trust, something that is not easy to achieve when the parties concerned are separated by perhaps thousands of miles, different cultures and languages, and limited face-to-face contact.

Establishing if a buyer or supplier is financially secure is more difficult when trading online or at a distance. When examining a business' credit worthiness, banks tend to look for anomalies, so companies should consider a similar approach. For instance, if the credit terms that are being requested or offered are different from the norm, a reason for this should be sought.

Cross checking

Whether buying or selling, taking time to check the details and reputation of overseas trading partners is advisable. Any information provided should be cross checked against other independent sources, such as industry bodies, the internet, credit agencies, and any available government support and information. Trade credit insurers have access to global credit databases which is another useful way of sourcing this type of information.

It is also important to make efforts to establish who actually owns a new trading partner's bank account. Details such as an International Bank Account Number (IBAN) and a SWIFT BIC code or similar may prove that it is a valid bank account, but not its ownership.

A standard stage in money laundering is the resale of assets originally purchased with the proceeds of criminal or terrorist activity. Therefore - and especially if an overseas supplier is offering goods at an exceptionally attractive price - it is important to know who actually owns the account to which payment will be made.

For further information about trading internationally, visit the HSBC Connections Lounge at the International Festival of Business in Liverpool where an HSBC Trade Specialist will be on hand to answer your questions or call +44 (0)800 78 31 300. Lines are open from 9am -5pm, Monday to Friday and calls are recorded for security and training purposes.

Key takeaways

  1. Due diligence on overseas trading partners should be at least as thorough as for domestic trading partners, and ideally even more so.
  2. Country risk is a vital element in the overall risk of an overseas trading partner and should be thoroughly researched.
  3. Cross checking of information on overseas trading partners from as many sources as possible is essential.

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