Introduction to importing: Part 2
This article is a continuation from part 1.
When you import goods, you may be required to pay (or accept payment) in a number of currencies. You need to arrange with the supplier or buyer in advance who will bear the costs of exchanging the currency.
In most cases the buyer (importer) will pay the currency conversion charges, although it now a lot easier for payment to be converted as it enters the bank account (particularly with Euro payments).
- Open Account (OA)
An open account is where you credit check the buyer, and organise an appropriate credit limit and credit period for payment. When you ship the goods, the payment is due a set number of days after.
This type of payment method is normally used only in strong or long-term business relationships, where you can be sure that the buyer will pay.
This type of payment is preferable to small businesses when importing, helping you keep positive cash flow. It is however much more preferable to have payment in advance when exporting.
- Documentary Collection (DP, DA)
The exporter sends a number of documents to the customer’s bank; when the customer pays in full, the bank gives them the import and release documents (DP).
In some cases, the customer will sign a ‘bill of exchange’, which sets out a specific number of days to pay (For example, 90 days after collection). When the customer signs the bill, they will receive the import and release documents (DA).
This is an effective method of payment for small businesses. It helps provide security for both the buyer and seller. You must be sure that the customer is reliable and creditworthy.
- Documentary Letter of Credit (LC)
The customer’s bank provides a ‘letter of credit’, which promises to pay the supplier as long as the terms are met (and the bank has the money to pay) (ILC). There s also a ‘confirmed irrevocable letter of credit’ (CILC). This is a promise by a UK (or a large world bank) to pay the supplier, and is even more secure than an ordinary letter of credit.
A letter of credit is the most secure way to be paid, but you must be careful to ensure that all documents related to the sale are correct, as a serious mistake can make the letter of credit worthless.
- Payment in Advance
This is the most preferable method of payment for a small business looking to export. It helps keep your cash flow positive, and minimises your risk in exporting. The main drawback is that few buyers will be willing to pay in advance, in case of problems with the order.
One solution is to arrange for part payment in advance. This provides some security that you will be paid, and helps to fund the cost of production and shipping; whilst allowing the buyer to check the quality of the goods before parting with the rest of their money.
Payment in advance is not preferable if you are importing, but if you are left with no other option, be certain to take Goods in Transit Insurance to help cover you against any problems.
Terms of Delivery
All importing must be covered by an effective set of delivery terms.
Inco terms are a set of international standard definitions that allow terms to be set without the risk of confusion, even when translated into different languages. They set out fair compensation rules in the event of a late, damaged, or missing delivery. They can also set out fair payment details once a complete delivery has been made.
One way to protect your business against a damaged or late delivery is to take out Goods in Transit Insurance. This covers the goods against damage, loss, late delivery or no delivery while in transit, providing cover against the damage that a late delivery can cause to a buyer.
Whether to appoint a local buying agent and why?
Local agenda can obviously help you – they have local knowledge and can overcome language barriers you might otherwise face. Buying agents will cost more money of course so it is something to thin about wisely. Whether to appoint one will largely depend on which country you are importing from. From Australia, you might manage well on your own, however, if the products are coming from say Ghana, or Papa New Guinea, you might prefer a local agent.
As you might expect, it is essential to form a good relationship with the agent. They can make or break your business! A list of agents can be found here.
When choosing which to appoint, you should refer in detail to their website and try to speak to someone, whether by phone or email first. Namely – check the water temperature before you put the baby in for its bath!).
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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