Manage the risks of exporting

Exporting can be a great opportunity to develop new customers and increase profits. However, trading internationally presents extra risks and challenges. You can’t eliminate these risks altogether, but you can manage and minimise them.

This guide looks at how you can control the risks, and the different risk management and insurance services you might use. It also highlights the importance of understanding your overseas market, and how international agreements can reduce financial and legal risks.

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Risks of exporting

Whenever you sell there are risks – your customer fails to pay, for example, or you get sued for harm caused by your product. But doing business with a customer in a different country, and perhaps using a different language and a different currency, can create extra risks and complications.

• Assessing the creditworthiness of your customer can be more difficult, while at the same time taking legal action to recover unpaid debts might be expensive or even impossible.
• Dealing with a different language, business culture and legal system can increase the risk of confusion and potential problems. Understanding the market is essential.
• Your customer’s country can present risks. For example, the country might be economically weak, politically unstable or prone to natural disasters.
• Goods generally take longer to deliver overseas, adding an extra delay from when you incur costs such as raw materials to when the customer receives the goods and pays for them. This can increase your financial burden so it’s important to check that you can afford to tie up working capital in exports. See our guide on cashflow management: the basics. 
• If you quote or sell in foreign currency, it’s a good idea to protect yourself against the risk of changes in the exchange rate. See our guide on foreign currency and exchange risks.
• If you are VAT registered, you must provide details of all your transactions with other European Union (EU) member states on your VAT return. You will need to complete additional monthly Intrastat declarations if your purchases from EU member states total more than £600,000 of goods and/or your sales to EU member states will reach £250,000 in a year. See our guide: introduction to Intrastat.
• Companies overseas may try to copy your ideas or abuse your trade marks, and it can be difficult to protect and enforce your rights. See our guide on intellectual property protection overseas.
• Managing international deliveries and payments can be more complex than when trading within the UK. You need to make sure that you have the right skills and resources. See our guide: preparing to export
• Your customer may be based in a country that imposes restrictions or limits on the type of goods you wish to export, which could cause delays or even prevent your dealings.
• If you are trading in a third country outside the European Union and there are trade barriers which make trading difficult, you can appeal to the Market Access Database (MADB) Complaint Register. This is a single entry point where you can request clarification on third-country tariffs, import formalities, documentation and other measures. You can also make complaints if you think trade barriers are unrealistic or illegal or are imposed unfairly. Find out about the Complaint Register on the MADB website- Opens in a new window.

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Minimise the risks of exporting

Market research helps you understand the risks of doing business in a particular country. You can then decide how you want to control those risks.

Initial ‘desk research’ in the UK is a useful start. You can read region and country profiles on the link2 website- Opens in a new window. You can also read country reports and find overseas sector reports on the UK Trade & Investment website (registration required)- Opens in a new window.

You should also check whether the UK has any agreement with the country to help reduce export risks. See the page in this guide on agreements with overseas markets.

You are likely to want to visit the country to learn more. Support and subsidies may be available through events and visits arranged by UK Trade & Investment. For more information, see the page in this guide on building your knowledge of overseas markets.

Working with the right partners can also help you reduce the risks as you can benefit from their expertise and contacts. For example, you might work with a reliable agent or sell through a local distributor.

Reducing financial risk

Before agreeing an export deal, you will want to assess the impact on your cashflow and make sure you have enough working capital. See our guide on cashflow management: the basics.

You may want some kind of insurance cover. For more information, see the page in this guide on risk management and insurance services.

For more information on insuring your business when trading abroad, see our guide on insurance for international trade.

If you are trading in a foreign currency, you also need to protect yourself against foreign exchange risk. The amount you receive (in pounds sterling) could be lower than you expect if the foreign currency falls. You can protect yourself using forward foreign exchange contracts and currency options. See our guide on foreign currency and exchange risks.

UK Export Finance, the UK’s official export credit agency may be able to offer you an export insurance policy, export credit guarantee or other product if your export contract is for semi-capital or capital goods and related services to the value of at least £20,000. For non-capital goods, if you have been unable to arrange an export insurance policy through a commercial provider, you may be eligible for a UK Export Finance product. UK Export Finance’s range of products and services include:

• insurance of UK exporters against non-payment of an export contract by overseas buyers
• the guarantee of bank loans to help overseas buyers finance purchase of goods and/or services from UK exporters
• sharing credit risks with banks in order to assist exporters in the raising of tender and contract bonds, in accessing pre- and post-shipment working capital finance and in securing confirmations of letters of credit
• insurance of UK investors in overseas markets against political risks

You can find information on UK Export Finance products and services for exporters on the UK Export Finance website- Opens in a new window.

Note that the actual amount and terms of support available will depend on the risk involved.

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Risk management and insurance services

There are several products and services available to businesses to reduce the risks of trading internationally. The type and level of insurance that will best suit the needs of your business will depend on a number of factors, such as the size and length of the contract and the amount of risk involved.

Partnership with a credit insurer

This is a tailored service, where the insurer identifies and assesses your business prospects and covers the risk on your exports.

Individual insurance policy per deal

This is a tailored policy and is ideal for one-off contracts that you would not need to insure regularly. There are many credit insurance companies that provide this service. UK Export Finance offers a range of products and services to complement commercial products and services and to support exporters who have not been able to raise finance commercially.

To make an initial assessment of whether any are right for your export needs, download the quick guide to UK Export Finance products [opens in a new window].

For more detail, you can browse the UK Export Finance guidance and application forms index on the UK Export Finance website- Opens in a new window.

Managed credit insurance

This scheme provides a full research service, providing country information, verifying customer details and credit limits, debt collecting and management as well as making claims. It is the preferred service for new or smaller exporters looking to contract out the risk.

The British Chambers of Commerce and the Association of British Insurers all have lists with details of reputable companies.

Details of specialist advisers can be found on websites of organisations such as the British Insurance Brokers Association (BIBA). Find a specialist adviser on the BIBA website- Opens in a new window.

The UK Trade & Investment Export Finance Team can advise companies seeking guidance on export finance and credit insurance matters.

For more information on insuring your business when trading abroad, see our guide on insurance for international trade.

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Knowledge of overseas markets

Apart from your time commitment, you should expect to invest in at least two short visits to – and some market research about – the country you are investigating. Detailed research and site visits will incur early costs but will ensure that you are targeting the right country, and are a wise investment to save costly mistakes later on. 

The following resources will aid your research of your potential overseas markets:

• Overseas Security Information for Business (OSIB) provides information on security, bribery and corruption, intellectual property, terrorism threat and organised crime. Find out about the OSIB on the UK Trade & Investment website- Opens in a new window.
• UK Trade & Investment can help you identify opportunities in overseas markets. Find out about researching export opportunities on the UK Trade & Investment website- Opens in a new window.
• The British Chamber of Commerce (BCC) can provide export training and support services, including trade missions under their Export Marketing Research scheme. These visits allow you to network with businesses from other countries, carry out fact finding and market research and gain publicity. Many of these trips are subsidised. 
• The Institute of Export also provides training for businesses in the area of export. Read about international trade training on the Institute of Export website- Opens in a new window. 

For more information on gaining knowledge of overseas markets, see our guide on researching and entering overseas markets.

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Agreements with overseas markets

Investment promotion and protection agreements between the UK and other nations exist to protect investors with internationally recognised standards. These will minimise your exposure to financial and legal risk when exporting.

The UK has over 90 such agreements in place at present, largely with developing countries.

Find information on investment promotion and protection agreements on the Department for Business, Innovation & Skills (BIS) website- Opens in a new window.

Key elements of these agreements include:

• provisions for equal and non-discriminatory treatment of investors and their investments
• compensations for expropriation (seizing property)
• transfer of capital and returns
• access to independent settlement of disputes

Governments of most developed countries show their commitment to fair treatment for investors through their membership of the OECD, European Union and/or European Economic Area and therefore there is no need for an additional investment agreement.

Double taxation

Double taxation can occur when a foreign country taxes your business as well as being taxed in the UK on the same income.

Many countries have now reached double taxation agreements with the UK where they will only tax your income once.

Find out which countries have double taxation agreements with the UK on the HM Revenue & Customs (HMRC) website- Opens in a new window.

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Supplying export information to HM Revenue & Customs via a freight agent

If you are an exporter, or use a freight agent to declare goods to HM Revenue & Customs (HMRC) on your behalf, you are legally responsible for the accuracy of the information given in the declaration.

If you supply inaccurate information to HMRC, you could incur a Customs debt or a civil penalty. Read about civil penalties on the HMRC website- Opens in a new window.

HMRC recommend that freight agents, acting as third parties, should routinely request the following information from exporters:

• Their UK Economic Operator Registration and Identification (EORI) number (this used to be TURN) for use in box 2 of the declaration – see our guide on the Economic Operator Registration and Identification (EORI) Scheme.
• Details of whom the goods are to be consigned to, their name and address in full.
• A commercial reference that can be incorporated into the Declaration Unique Consignment Reference (DUCR) to assist with the export audit trail.
• Details of where the goods are to be exported – ie country of final destination.
• Shipping or flight details (if known).
• Correct value of goods and correct currency code.
• The Commodity Code if known, and a clear and unambiguous description of the goods, their quantity, marks and numbers.
• If the goods have been previously imported, or are later to be re-imported to a Customs Relief, you need to know so that the correct export procedure code (CPC) can be applied. If an incorrect CPC is used, it can lead to any Customs relief on Duty and VAT granted at import, being liable for payment/repayment by the exporter or yourselves. If the appropriate CPC is known then this should be quoted on the export papers supplied by yourselves yet, as specialists, you may still wish to verify that the code quoted is correct.
• Any reference numbers previously issued by HMRC such as Inward Processing Relief, Outward Processing Relief authorisations or previous declarations should also be provided.

After checking all the information provided by the exporter, you should also:

• Confirm, where a UK EORI number is not provided, that the exporter is not registered and give consideration to the correct procedure to be used for the goods – ie is the export a private export or, if commercial, should the exporter first obtain an EORI number? Incorrect use of PR or UNREG terms may restrict your clients’ ability to zero rate their goods for VAT purposes.
• Check that the destination is a third country and not a European Union (EU) member state. Many exporters are unaware of which countries are members of the EU and look to their agents to confirm whether the goods qualify for export.
• Ensure that an item is entered for each Commodity and not bulked for convenience.
• Ensure that a declaration is made for each exporter and not bulked for convenience sake (unless approved to do so within Memorandam of Understanding (MoU) approved procedures). Where identity of the exporter cannot be confirmed, VAT zero rating may be affected. For more information on using an MoU, see the page on Approved Fast Parcel Operators exporting under a Memorandum of Understanding in our guide on International Trade Fast Parcel Operators.
• Use any DUCR provided when receiving details from your customers . If a DUCR is not provided then the guidance in the Tariff should be followed. In the Air environment, air waybill (AWB) numbers are often used in the latter part of the DUCR yet in other freight areas it is helpful, for audit purposes, to use exporters commercial reference(s).

Owing to the increased use of official electronic records by HMRC, they strongly recommend that, to assist exporters, the actual DUCR/Master Unique Consignment Reference (MUCR) used or the CHIEF Export Entry Reference (Entry Processing Units, Entry Number & Date) is notified to your clients. HMRC need to be able to trace the shipment through the traders’ records to enable them to help verify claims for VAT zero rating on exports.

Many shipments are notified via inventory booking references so these are also worth confirming with Port loaders. Where goods have been consolidated, the higher level MUCR should always be used.

For general information on the sector, see our section for freight forwarders.

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