Once you have written your import or export strategy for international trade, it’s key that you are aware of the financial risks.
This should include conducting basic credit checks on your customers and identifying any potential issues that may stop you gaining business or being paid.
If you are dealing in a foreign currency, when agreeing a price for your goods it’s possible that the exchange rates may change in the interim between the quotation date and the date of settlement. This can, of course, work to your advantage, but it is a gamble and you could just as easily suffer a financial loss.
You can eliminate foreign exchange risk by quoting in pound sterling. This essentially transfers the risk to your customer. However, if your competitors are prepared to invoice in the local currency you may have to do the same.
To minimise the risk of working with local currencies you can enter into a forward exchange contract with your bank. This is a formal agreement to fix the amount of sterling you will receive when payment is made in the foreign currency.
Always make thorough checks of your customers to establish that they are solvent. Other questions to be asked are: do they have a trading history and do they own/rent the premises from which they are trading?
Even in countries deemed low risk, it is still quite possible that you will meet customers who are high risk, so it’s worth doing extra credit checks to give you absolute peace of mind.
To avoid non-payment, it is advisable to take out Export Credit Insurance in both high and low-risk countries.
Depending on where your market is, you should be aware of local factors that could affect your trade:
Another thing to consider when you’re getting started in international trade is insuring your goods. This will give you peace of mind in the event of shipment damage or loss.
There are a couple of types of insurance to consider, below is a summary of each:
To protect your company against non-payment, it’s important to insure your export orders, even if your customer is a well-known or reputable company in a low-risk country. Your chosen insurance company will cover the payment risks involved in international trade.
The very nature of exporting and importing means that goods can be in transit for a number of days, with the unfortunate risk of damage, loss or delay. Most international carriers take great care to minimise such risks. It’s sensible to insure your goods according to their value so that you are sufficiently covered in the event that something goes wrong. Cargo insurance covers loss or physical damage to goods whilst in transit, and covers transportation by air, road, rail and sea. You can get more comprehensive cover to protect against specific incidents, such as theft or damage during loading. The Incoterm® 2010 Rules specified in your contract of sale will determine who is responsible for arranging this cover. As the exporter, you are obliged to arrange insurance cover under Incoterm® 2010 Rules CIF and CIP. In such cases you should build this cost into your quotation.
Getting paid in international trade is slightly more complex than when you get paid by customers in the UK, so you’ll need to weigh up which is the best way to ensure you get paid based on the amount of risk you are willing to take.
There are four main methods of payment, varying in security. The method you choose should be determined by the credit checks you have made regarding your customer and the degree of risk you are prepared – or can afford – to take. Below is a summary of each method so you can weigh up the risks and benefits.
Being paid in advance of delivery ensures that you receive full payment before shipment of the goods and is therefore the most secure method.
One way of reducing the risk of non-payment is to request a letter of credit from your customer. It is issued by your customer’s bank and guarantees that payment will be made, so offers a high level of security. You will also need to agree to certain terms set out by the bank e.g. providing documents as proof that you have supplied the goods for which you have been contracted. For extra security, you may prefer to ask a UK bank to confirm your customer’s letter of credit. This will ensure that your UK bank will make the payment in the event that your customer’s bank doesn’t. It is also advisable to obtain an irrevocable letter of credit. It cannot then be changed or cancelled unless all parties are in agreement. A revocable letter of credit, however, can be changed or cancelled by the bank at any time.
Bank documentary collection is a recognised procedure used in international trade in which a bank in your customer’s country acts on your behalf to collect payment for your goods. The bank will take receipt of all shipping and collection documents (sent via your own bank), handing them over to your customer in exchange for payment of goods. You receive your payment and your customer has the necessary documents to collect the goods.
An open account is where you agree to ship the goods to your customer and issue an invoice for payment, usually quoting a credit period such as ‘30 days from date of invoice’. The risk here is obvious and this method is reliant on trust and a good business relationship.