Internationalising safely

By: Nuno Ferreira - International Business Manager

This year, two decades will have passed since two promonitory events dictated what has come to be the economic history of the 21st Century. If there is little to say about the September 11 attack on the World Trade Center in New York - a symbol of universal capitalism - few could have foreseen the revolution that China's entry into the World Trade Organization in December 2001 would represent in the following years. Since then, new global trends have emerged and Portugal has been faced with a double challenge: (i) to overcome its peripheral situation, both in the European context and in the decision-making centres of the global economy and (ii) to break through the wall in which its economy finds itself in the context of international economic relations, solving its lack of competitiveness. Not to mention the effects of the Covid-19 pandemic.

The need to implement a national strategy to overcome this double challenge requires a reformist and modern State, which places national companies as the main engine of development, modernising them, including them in the digitalisation process of the economy and, increasingly, internationalising them. Some steps have been taken in this direction, where the programmes promoted by IAPMEI (with particular emphasis on Portugal 2020) stand out, but many national companies still face difficulties when they are faced with the issue of survival in a global market, where often financial issues prevail as an obstacle to the achievement of new business. The good news is that there are solutions.

Despite the turbulence felt in the national financial sector, Portuguese banks have proved to be good partners in the international activity of Portuguese companies, supporting them with specialised advice and a wide range of products and services, consisting of a set of appropriate products and services, namely in the coverage of exchange rate and credit risk. The existing financial instruments for supporting exports, commonly known as trade finance, the banks have developed an extensive network of correspondent banks and a number of agreements with banks and multilateral institutions such as the International Finance Corporation (World Bank Group).

Looking at trade finance solutions trade finance, the first of these financial instruments to support exports are the Documentary Collections. In export consignments the financial documents and/or commercial documents negotiated between exporter and importer are sent for collection. In import consignments, the bank collects the value of the documentation. This is a fast and efficient service guaranteed by a vast international banking network.

However, when we are faced with opportunities that require greater security in transactions and seek to strengthen new business relationships with foreign suppliers, documentary credits are the most appropriate solution. Here, the bank confirms export documentary credits by means of the conformity of the documents presented by the exporter. If the payment term is deferred, the beneficiary may negotiate with its bank a discount of the amount. In import operations, the bank makes payments to third parties, or pays commercial bills drawn by the payment beneficiary, or authorises such payments to be made, accepted or negotiated by another bank, relying for that purpose on its network of correspondent banks.

Turning to agreements with multilateral institutions, these are designed to promote exports by companies in non-traditional markets with higher risk, through partial/full coverage of political and financial risk, constituting a safe way of negotiating payment conditions with importing companies and ensuring payment of the value of exports. These programmes, often called trade finance facility programs, in which national banks participate as confirming banks, allow operations in most emerging markets with hedging taking place through instruments such as letters of credit, stand-by letters of credit and bank guarantees (bid bonds and/or performance bonds), among others.

There are also various lines of support for sectoral exports of national goods and services specific to different countries. Likewise, there may be operations in higher risk markets that justify the existence of credit lines aimed at financing large export operations of capital goods and/or services in the form of credit to the importer, eliminating the country risk and the credit risk for the national exporter.

If up to now the focus has been mainly on supporting exports, other needs exist that justify various financing solutions aimed at facilitating business with international partners, such as (i) short-term finance for treasury associated with exports or imports (invoices, payables, free remittances), (ii) medium and long-term finance for investment for the creation, expansion or modernisation of production or commercial capacity and R&D and innovation and other purposes, and (iii) financing projects abroad, in countries where national banks have a direct presence or others with which they have partnerships.

When the topic is risk coverage, financial partners should present options to guarantee sales receipts and protect the company from unfavourable variations, such as credit insurance, exchange rate risk coverage and interest rate risk coverage. If in the first situation there are insurers such as Cosec, Coface or Crédito y Caución (to give some examples), the second and third are usually included in the offer of the banks with which companies manage their daily business.

For companies whose internationalisation process implies a presence beyond national borders it may be necessary to provide international guarantees or collateral, notably performance bonds (performance bonds), for contests (bid bonds) and for advance payments (advanced payment bonds) which domestic banks may provide directly or through their network of correspondents abroad. If a company has opened a branch, affiliate or subsidiary in another country, it may need to open an account with a local bank and make payments abroad, as well as incoming payments and other credit needs, which may involve exporting its existing relationship with its bank in Portugal to a new financial institution in that country.

All the above situations will fit different moments of the international activity of each company. However, for businesses in international expansion, there are venture capital solutions (such as temporary participation in the company's capital) and Investment Banking solutions (such as mergers & acquisitions, capital markets or project finance) that may be more suited to the internationalisation processes of each company.

Therefore, regardless of the moment each company is going through in its approach to the global market, it is fundamental that entrepreneurs become familiar with these international business support tools in order to take advantage of the opportunities that foreign trade may represent for their companies. Globalisation has put the turbo into capitalism but it is still necessary to conduct business across borders safely.

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