When you export 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).
Payment methods
1.
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.
2.
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.
3.
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.
4.
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 or exporting 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.
Insurance
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.
This is particularly important if you are an exporter, as the cost of replacing goods will usually be very high, as well as the cost of the business you may lose because of the problem.
How Will Exports Be Sold?
If you are exporting your products, have you thought about how they will be sold once the get to their destination country? There are three main ways of selling exported products:
1.
Direct to Companies
This involves selling directly to companies that wish to import your products, which will then use them, or sell them to the general public.
Direct selling allows you good control over where your products are sold; however, it relies on you having enough staff to deal with both UK and foreign orders. As a small business, the costs of employing more staff may limit the income you can gain from exporting; although if you are only dealing with small numbers of orders (I.e.: One big order not four little orders) then direct sales could prove quite cost effective.
The other drawback of direct selling is that the marketing of your product must all be carried out from the UK, making customer relations more difficult.
2.
Through a distributor
This involves exporting your products to a distributor, who then sells and delivers to the shops
Using a distributor allows you to sell to a range of buyers when you export; there is no need to spend on extra employees to deal with individual sales. The main drawback of using a distributor is that they will take a percentage of each products cost, meaning that the profit you make from each item is lower.
Using a distributor is common for smaller businesses that do not have the capacity to sell in more than one country. The lower profit costs are often helped by the improved sales that an effective distributor can bring, although the vast majority of the marketing will still be left to you.
3.
Country Expansion
This involves opening a branch or company division in the country you are exporting to. This allows you to deal with all the sales and marketing directly.
Expanding into a country will allow you to keep more of the profit than you would get through a distributor, and allows you total control over the sales and marketing of your product.
Expansion is expensive and risky. The vast majority of small companies would not be able to sell enough goods to make even a small country expansion cost effective; and are better off using direct sales or a distributor.
4.
Licensing
This involves the export of your product to a licensee, who then sells and markets the product, in return for a large share of the profits. This may involve you exporting the parts, and the licensee constructing the product and packaging in the specific country.
The main drawback of licensing is that you are left with little control over how your product is marketed or sold. You make less money off each unit, but you will also save on the costs of marketing and expanding abroad.
Licensing is usually only possible where the product is unique or manufactured directly by the company; products that are bought in cannot usually be licensed out.
Small businesses are not generally likely to use licensing for exports, as the sales are not usually big enough to attract licensees. The exception to this is with new inventions or products, where the small business or individual that creates the product cannot afford the costs of production, and licenses it out to another company (or a separate company in each country).
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