Global import opportunities have seen a growing number of first-time importers test the market. While the rewards can be lucrative, there are traps that many first-time importers fall into.
Scottish Pacific Tradeline has assisted many start-ups and small businesses to smooth the way for importing, and given our clients’ experiences we’ve come up with these top ten tips for first-timers.
1. Research suppliers
Compare and contrast as many suppliers as possible. It’s important to understand whom you are dealing with. Is it the actual manufacturer or a trading company? Sometimes it can be difficult to tell the difference. Complete a factory visit for your top choices. Make sure the factory name is consistent with the name of the company that has quoted you. Know who you are dealing with and whether your supplier will be the actual exporter or if they will be using an export agent or trading company.
2. Understand the quote components
Ensure that the various quotes you receive are broken down to include individual component costs, labour and any other charges. This will make it easier to compare quotes and also to control potential future price increases. For example, if the cost of materials that go into the product have increased 30 percent, the supplier could request a 30 percent price increase. However if materials account for 50 percent of the quote then an increase of just 15 percent would be justified.
3. Understand when goods become your responsibility
Insist on the appropriate Incoterm (an Incoterm determines the tasks, costs and risks for the buyer and seller for transportation and delivery of goods). Incoterms determine when the importer is responsible for the goods and what insurances are required. Get familiar with terms such as FOB – Free On Board, CIF – Cost Insurance Freight and EXW – Ex Works.
4. Understand the freight and logistics process
Too often deadlines are missed because of mismanaged logistics. Research your freight and logistics provider. Make sure they can demonstrate experience in cargo management from the area in which the supplier is located. Take the time to understand each phase of the process, including inland transit, container storage and consolidation (if required), shipping and clearing the goods once landed. Make sure you understand the full cost of landing the goods including government duties in your jurisdiction.
5. Local relationships are key
The process of importing goods does not always go smoothly. The chances are that you won’t be around when a problem occurs. For this reason it can be important to have a relationship with a party aside from your supplier. This party, who could be a sourcing firm, inspection organisation or an export agent, will be somebody who is experienced and who can quickly assist to get the process back on track.
6. Complete a pre-shipment inspection
Once the goods are shipped, it is extremely hard to organise for goods to be returned. Getting a credit or a refund can be just as difficult. Ideally, you should be completing an inspection of goods on all shipments. This process is even more important when you are dealing with a new supplier.
7. Insist on adequate insurance
Once the importer knows when they are responsible for the goods (via the Incoterm), it is vital to have the cargo insured. Many importers mistakenly believe insurance will be covered by the freight forwarder who facilitates the import. This is not so, and it’s an unfortunate fact that marine shipping containers do get lost. One notable example was in February 2014, when 520 shipping containers were unaccounted for as the vessel Svendborg Maersk was struck by high wind and waves off the coast of France.
8. Hedge currency risk
US dollars is the key currency for most import transactions with China and the surrounding region. Value fluctuations in local currency against the US dollar can seriously impact gross profit margins. One way for importers to avoid this risk is to liaise with currency providers to set up Forward Exchange Contracts that lock in an exchange rate.
9. Minimise deposits
Most suppliers insist on an up-front deposit before they start manufacturing. Deposits impact cash flow and increase the risk of the transaction. Keep in mind deposits can be very difficult to recover if there are any unforeseen complications. Many suppliers try to avoid letters of credit (LCs), but really they should form part of any importer’s conversation with suppliers. LCs can be used instead of deposits to minimise risk and the impact on your cash flow.
10. Take measures so your cash flow isn’t under pressure
The upside for importers is that buying goods from overseas suppliers can often deliver exceptionally strong gross margins.
The downside can be the negative impact on cash flow (more so than buying from domestic suppliers) as importing involves significantly longer cash cycles, meaning businesses need much greater levels of working capital. Trade finance can help buffer an importer’s cash flow. At Tradeline, credit limits are available from USD $5,000 to $2,000,000, with larger requests considered. Security such as a mortgage or a charge over your company is not required, and as releases from your bank are not required there is no impact on your bank facilities. Up to 90 percent of the purchase price can be provided and the maximum term is 90 days from shipping date or invoice date.
Craig Michie is Head of Trade Finance and a director of Scottish Pacific Trade Limited. A qualified accountant and Fellow of the Institute of Public Accountants, Craig has more than 25 years experience in banking and finance and is one of Australia’s most experienced specialist working capital lenders. He has headed businesses for major banks as well as founding a specialist trade finance business that was acquired by a bank. Craig has extensive experience in Asia having established businesses in China and Hong Kong. He has travelled extensively throughout China developing relationships with key suppliers to buyers from across the globe.