Small businesses can go global, but avoid these financial pitfalls

Many small business owners are feeling less than hopeful at the moment, what with rising inflation, growing recession fears and the lingering effects of a global pandemic. But there's a light at the end of the tunnel for some, and it involves taking their businesses global. Looking beyond U.S. borders for growth opportunities isn't for every small business — you'll have to assess what makes sense for your needs — but many members of the small business community are finding success worldwide. 

According to a study by the Institute for International Economics, opening up offices in overseas markets can offer a multitude of benefits. U.S.-based companies that export not only grow faster than non-exporting companies but are also 8.5% less likely to go out of business. Since nearly 96% of the world's consumers and two-thirds of its purchasing power reside outside the United States, the potential for small business owners to attract new customers and accelerate revenue growth is massive. 

Small businesses represent 98% of all exporters. In addition to helping boost profits and stabilize sales, exports can lead to an expanded and more diversified market reach. 

Nevertheless, opening a new office or building an e-commerce presence in a foreign country is challenging to navigate. Over half of small businesses in an independent survey conducted by Wise reported being discouraged or felt prevented from operating abroad. The majority cited factors related to the cost and complexity of making and managing international payments. It is clear that more effort must be put into unlocking global exporting capabilities for U.S. small businesses. 

To navigate these obstacles, small business owners need the kind of tools that not only assist with communication and logistical concerns, but also remove complications from the international payments process. There is a clear need for support for currency exchanges, payments, fees, regulatory requirements, and money transfers — just to name a few. Below are a few things small businesses should watch out for when deciding to operate abroad.

Hidden fees and exchange rate markups

Small businesses lose billions of dollars a year in preventable, hidden fees when making international payments. Independent research found that of the $16 billion in fees U.S. consumers and small businesses paid when sending or spending money abroad, more than half ($8.7 billion) were hidden in the form of exchange rate markups. Small businesses accounted for a whopping $2.3 billion in the form of buying and selling goods and services abroad, and an additional $66 million in payments to international employees. These charges hurt small business owners recovering from the pandemic and dealing with inflation.

Small business owners should be aware of misleading pricing by banks and money transfer providers, as advertisements stating "$0" or "no fee" often have significantly inflated exchange rates, sometimes 7% or more. Carefully selecting providers that do not hide fees in the exchange rate markup is crucial. 

Inability to pay in local currency 

In addition to high fees, technical hurdles can pose big problems. Small businesses have struggled with expanding abroad using their existing bank information or software. For example, some regions — especially Europe — rely heavily on International Bank Account Numbers, or IBAN,  a system for identifying bank accounts and processing transactions across national borders. Without local account details or an IBAN, operating abroad for business purposes can be difficult and expensive. Small businesses face similar hurdles when handling payroll or other payments with traditional accounting software not intended for global use. 

To avoid fees and delays, small businesses can acquire local account details by using a multi-currency account. Small businesses can also use software intended for international payouts to reduce exchange rate costs and delays. 

Lengthy transfer times 

Transferring money internationally can also be tricky. If a business requests a transfer before their bank's cut-off date, an international wire transfer should arrive within one to five business days. But a number of factors can cause delays. Some are outside anyone's control, but others can be mitigated. 

When transferring money internationally, managers can help expedite the process by paying close attention to bank holidays, weekends, the accuracy of the recipient details, time zone differences, how quickly the payment provider typically completes transfers, the number of intermediary banks involved in the transfer and anti-money laundering and fraud regulations. Keeping tabs on all these factors can help a business prepare for payment delays that can tie up much needed cash flow or impact relationships with employees and customers.

Invoice payment delays and fees 

When kicking off operations in new markets, it's not unusual for small business owners to face invoice issues. This occurs often because of unfamiliarity with currency details and payments, resulting in delays and fees. When invoicing in a foreign currency, businesses should establish 

clear payment terms (including the currency of the invoice), monitor carefully for incorrect details on the invoice, and confirm that the currencies involved are supported by the provider. This should all be completed before sending foreign currency invoices. 

Payments are frequently a major barrier for small businesses going global, and this must be kept top of mind for any small business planning to expand internationally. In the future, U.S. regulators can do more to support these small business owners as they navigate international payments by updating existing support materials to include information on them. Ahead of these updates, it is important that business owners focus on ways to mitigate pain points to have the most effective expansion strategy for their business to thrive.