Caution urged over trading with new EU states

The addition of Cyprus, Malta, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia to the EU has opened up markets and trading opportunities previously under-exploited by UK companies.

While there have been concerns among business groups that the EU’s enlargement might result in higher taxes and more red tape, exporters have appeared keen to take advantage of the new openings.

However, a financial expert from one of the UK’s leading banks today urged companies to curb their enthusiasm amid concerns about the payment practises of the new member states.

Ted Ettershank, managing director of Lloyds TSB Commercial Finance, said: "UK firms are right to look for new opportunities, but they must do their homework first. It's great to find new trading partners and to get deals signed, sealed and delivered, but only if it translates into hard cash within an acceptable timescale.

"While it's exciting to be offered a huge contract always think about what would happen to your company if you deliver, but the money fails to materialise. Don't put your business at risk - it might be worth testing the water first with a smaller order and then gradually building on the trust and relationship that develops from there".

The concern stems from the lack of knowledge about the trading practises of the new countries. Getting information about what to expect in established European markets is fairly straightforward, because important facts such as average payment terms, whether to expect delays, standard contracts and trading practices are well known and documented.

To help safeguard companies looking to trade in any of the new EU states, Lloyds TSB provided the following advice:

• Seek advice from UK credit agencies that have already established relationships with local credit agencies in the new member states and whose reports are considered reliable. While no guarantee, it makes sense to be as sure as possible who you are trading with and whether you are likely to be paid or not.
   
• Local currency accounts are available through British banks for the Czech Republic, Hungary, Poland, Malta and Cyprus. For the other countries, UK companies will need to invoice in a different currency: sterling, euros or US dollars would be the best bet as they are freely tradeable within the UK - however US dollars could present problems with big currency fluctuations. Companies will need to bear in mind that the price agreed may end up being different from the price finally paid because of exchange rate fluctuations. Sometimes this will work in their favour and sometimes against, but pricing and payment terms should reflect this risk.
   
• Obtaining export finance in order to trade in these emerging markets could also be more difficult, as many finance providers will be put off by the greater credit risk. Again, as trading becomes established, this should settle down, as the risk becomes more acceptable to lenders. But in the meanwhile pioneers could look at newer forms of finance, such as asset based lending, which links finance with the assets in a business and therefore is not so swayed by perceived 'risk'.
   
• Cyprus and Malta are both countries with established trading links with the UK. There's also the added comfort of being able to set up a local currency account with a British bank. Cyprus in particular has a strong UK legacy with its legal system closely based on that of the UK. Both countries should not present problems with language either - so trying to get payments should not be too problematic for UK companies.
   
• Some UK companies have already established links with Poland the Czech Republic and Hungary - the telecomms industry in Poland has been a magnet and the Czech Republic has attracted UK-owned processing plants. However, the remaining Central and Eastern European states are still very unfamiliar to the UK, and offer wildly different attitudes to trading rights and law. In addition, they have not yet been obliged to apply European law - and in fact have been given transitional provisions and temporary exemptions to help ease the tremendous change to their individual legal systems. At the same time, their legal and judiciary systems are struggling to digest, and then implement, alien law. The upshot is, don't expect EU law to offer complete protection, but wherever possible do try to engage a lawyer well-versed in EU law.