Hi! We’re Terms.Tech, and our mission is to revolutionise B2B payment terms for European merchants and marketplaces. How? With a simple but comprehensive delayed payments solution. This article looks at six typical trade risks we discovered in our survey of European SMEs. Get in touch!
What if…
⏰ …that new customer seemed so nice, but they missed their payment deadline and your cash flow is hurting now?
🚢 …a shipping container gets lost at sea?
💱 …the forex markets are a volatile roller coaster ride and who knows what the exchange rate will be in 60 days?
🦹♂️ …you’re worried your creative ideas might fall into the wrong hands?
Small businesses face numerous trade risks like those when navigating the rough waters of B2B trade. Along with our AREA42 colleagues, we recently concluded a survey of top SME movers and shakers. Our survey asked them to identify applicable trade risks to their businesses.
Let’s see whether their rankings are similar to the trade risks you know you have to overcome.
Trade risks applicable to SMEs — survey says…
About our SME survey
The survey focused on various aspects of an SME’s operation, including applicable trade risks. The survey targeted SME founders, owners, CEOs, and CFOs. We included a range of business sizes: micro enterprises, small businesses, and medium-sized enterprises. Results came from company leaders across 25 European countries.
Survey results
Our trade risks league table shows the percent of survey respondents identifying the applicable trade risks to their business. Credit risk very easily takes the gold medal — more than 22 percentage points ahead of currency exchange risks, which receives the silver. And just a few more points behind, bronze goes to shipping risks.
- 🥇 Credit risk — 74.1%
- 🥈 Currency exchange risk — 51.9%
- 🥉 Shipping risk — 47.2%
- Compliance risk — 45.4%
- Reputational risk — 38.9%
- Intellectual property (IP) risk — 30.6%
- Other — 5.6% (These included: supply capabilities, construction market, cost chain, payment terms, legal disruptors.)
Top 6 applicable trade risks for SMEs — a closer look
Let’s check out the top six B2B trade risks that SMEs face and have to mitigate on a day-to-day basis. We’ll explore what they are, identify some historical examples, and drop in a few risk mitigation tips, too.
What is credit risk?
Credit risk ranked as the top trade risk, with three-quarters of our respondents saying this applies to their business (74.1%). Credit risk in the B2B trade context is the potential that a customer does not pay, or that they pay late, when paying with payment terms (e.g. 30, 60, 90, 120 days). This can damage your cash flow and limit your ability to carry out business smoothly.
The most straightforward way to avoid credit risk is to demand immediate payment upon delivery. But, using payment terms is more common in B2B trade. For example, research showed 60.4% of the value of B2B trade in Western Europe in 2019 was on trade credit.
Checking a business partner’s creditworthiness and taking out credit insurance can both help to reduce the risk. In addition, Buy Now, Pay Later solutions, such as Terms.Tech, are fast emerging in the B2B world having had some success in the B2C environment.
Terms.Tech gives suppliers and merchants fast access to their funds and manages the risk of non-payment from buyers. This helps take the uncertainty away from you and your business customers. Terms.Tech uses its own credit risk algorithms to combine extensive third-party data with historical performance data ensuring there are no missed opportunities.
Other more traditional ways to mitigate credit risk may include:
- dunning (late payment of invoice letters),
- factoring (contracting third parties to take on some of the risk),
- credit insurance, (from a third-party insurance agency; 54% of Western European companies report using credit insurance in 2022), and
- letters of credit (a type of guarantee from a financial institution).
What is currency exchange risk?
Currency exchange risk refers to a potential decrease in value of goods or services because of changes in values of the currencies involved. You may also hear this referred to as exchange-rate risk, currency risk, or foreign exchange (FX) risk. Currency risk emerges when doing international trade involving more than one currency.
Time lag is the main issue — between signing a contract and delivery and payment terms exchange rates can affect the trade value. The result: one of the trade partners could suffer a loss. Although FX risk is in-built whenever trading in multiple currencies, you can mitigate this risk. For example, lock an exchange rate into the contract. Or, think about taking out foreign exchange insurance.
Currency exchange risk was ranked second, with just over half confirming this risk (51.9%).
What is shipping risk?
Will your goods get from point A to point Z? Whatever can go wrong in between A and Z are shipping risks. You’ve probably seen the pictures of that truck full of tomatoes recently — well, more like that empty truck! Oh, and the poor tomatoes turning into juice on the highway. We can giggle, but it’s a great example of a trucking or shipping accident.
Other main types of shipping risks include:
🏴☠️ Piracy (and/or terrorism)
🫣 Human (or machine) error
📦 Lost merchandise (or even lost ships!)
🌪️ Weather delays
You can mitigate the risk by using reputable shipping and logistics organisations, doing due diligence on that, and using insurance products. But, sometimes accidents or unexpected things just happen.
Almost half of our respondents reported shipping risk as an applicable trade risk (47.2%).
What is compliance risk?
Compliance risks are legal and financial issues your company could face by not complying with laws or regulations as determined by governing bodies or regulators. Non-compliance can also occur against a backdrop of internal company standards.
Non-compliance consequences can be minor, e.g. a warning to comply. Or major: large fines, business interruption (licence suspension, closing a plant), or even imprisonment.
If you’re doing international B2B trade, one area of compliance to particularly keep an eye on are import/export regulations. And, of course, bear in mind legal compliance can be a minefield — you’ve got global, regional, country, or even local laws to navigate.
And, of course, now there’s GDPR to comply with, too!
Compliance risk, with just under half of our respondents (45.4%), comes in a close runner-up. Compliance takes time — a lot of time! But, when news gets out of non-compliance, this can crossover with our next type of trade risk: reputational risk.
What is reputational risk?
Warren Buffett famously said, ‘It takes 20 years to build a reputation and five minutes to ruin it.’ Reputational risks are anything that could damage your company’s name or good standing and subsequent lack of trust and avoidance of the enterprise. Almost two-fifths of our survey respondents perceive reputational and ethical risks as a danger to their business.
Reputational risks could come from actions and decisions your business has taken, for example Volkswagen’s nox emissions scandal. The behavior of individual members of the company can also ruin a brand, for example sexual harassment by a company leader. Reputational damage additionally comes from choosing the wrong trading partners — how can we forget the horsemeat scandal of 2013!
Deloitte provides a clear pathway towards reputational resilience.
What is intellectual property risk?
Almost one-third of our respondents viewed Intellectual property (IP) risk as an applicable trade risk. IP risks come from many directions. Governments can change the IP rules over time. Your competitors, subcontractors, and independent 3rd parties may be IP vampires. And, of course, there are purely illegal efforts to hack and copy or counterfeit your designs, services, ideas and products. On top of that, crossing borders makes it more difficult to track, protect, and defend.
The European Union Intellectual Property Office (EUIPO)’s The Ideas Powered for business SME Fund is a great way to pay for some of the costs (e.g. patents, trademarks).
Identify and take action to reduce trade risks
Trade risks are ______. Fill the gap with the metaphor you most prefer! A minefield. A labyrinth. A raging sea. A tangled web. A roadblock. A nightmare! You get the point.
The key is to identify your company’s applicable trade risks and to take steps to mitigate the risks. Improve your business credit score, take out credit insurance, or set up contractually fixed exchange rates. Don’t just have policies in place, but also enforce them to protect your business reputation. Are there trade technologies that can help you mitigate your trade risks?
Making use of BNPL solutions such as Terms.Tech may also reduce risks attached to B2B payments. Why wait to find out more? Get in touch with our Terms.Tech consultants and see what the best BNPL solution is for your operation.
Finding the right way to reduce trade risk will help to drive your business forward, grow, and succeed.
