BASIC GUIDE TO EXPORTING, DEEPAK JOSHI [i can read with my eyes shut TXT] 📗

STEP 8: IDENTIFY YOUR EXPORT FINANCING REQUIREMENTS

 

 

 Step 8: Identify your export financing requirements

 

·       Understanding the risks of export financing…

If by chance your first international order is far larger than you expected, how are you going to finance the expansion you need? Payments can take months, and buyers may default or go out of business.

Self-financing a growing export business can be very risky, especially for new or smaller exporters. Fortunately, there are options that can minimize your risks and even give you a competitive edge.

Be prepared to meet increased demand from a successful foreign sale. Ask for advanced payments to cover the cost of increased demand and reduce risk.

Because of this, your export drive will need a reliable cash flow. You will also need a comprehensive financial plan for the export venture. If you don't have one, it will be very difficult to arrange the financing your venture may need.

The most important objective of your plan, however, is ensuring that your company always has sufficient cash or operating lines of credit. To do this, the plan must include:

a cash budget that highlights your financing requirements over the next two or three years, so you can determine the timing and amount of your cash expenditures. a capital budget, which is a longer-term overview of the funds you'll need to complete your export project, that provides an operating plan against which you can measure actual expenditures and revenues and tells you when the project will start generating positive cash flows.

You'll need to know the timing of both cash inflows and outflows. Cash flow planning can help you defend against such problems as:

exchange rate fluctuations transmission delays exchange controls political events slow collection of accounts receivable

Accurate details are important to the overall effectiveness of your export plan.

International trade payments usually take longer to arrive than domestic ones, so allow for this in your cash flow planning.

Export Myth: Exporting is too risky…

Exporting doesn't need to be riskier than doing business at home—it's just different. Letters of credit, export credit insurance and reference checks through banks and international credit reporting agencies can help protect your business. Trade laws also tend to be straightforward and legal advice about them is easily available.

 

Methods of collecting payment…

There are several ways for customers to pay an invoice in international trade: cash in advance, letters of credit, documentary credit, documentary collection and open account. We'll examine them in order of increasing risk to your company.

ü Cash in advance

Cash in advance is your most secure option because it eliminates all risk of non-payment and adds to your working capital. Unfortunately, few foreign buyers are willing to pay cash in advance, although some will pay a portion when goods or services are specially ordered. For services, a retainer might be paid upon signing a contract, after which progress payments are matched to deliverables.

ü  Letters of credit

Letters of credit (L/Cs) name a bank to receive and check shipping documents and to guarantee payment. With an L/C, the costs of financing a transaction may be borne by either the exporter or importer.  Both sight- and term-payment provisions can be arranged.

Letters of credit can be confirmed or unconfirmed. For example, a Canadian bank can confirm an L/C issued by a foreign bank, thus guaranteeing that the Canadian bank will pay the exporter even if the foreign bank doesn't. This kind of L/C is much better for you than the unconfirmed one.

L/Cs can also be irrevocable, which means they can't be cancelled or amended without your approval. The most secure L/C is one that is both confirmed and irrevocable.

In practice, an L/C works like this:

The customer arranges an L/C with his or her bank. The customer's bank prepares an irrevocable L/C. This includes specifications as to how you'll deliver the goods. The customer's bank sends the L/C to your Canadian bank for confirmation. Your bank issues a letter of confirmation and sends the letter and the L/C to you. You check the L/C very carefully. In particular, you ensure that it agrees in all respects with the terms of your contract with the customer. If the L/C's terms and those of the contract are different, and if you don't meet the L/C's terms because you overlooked the discrepancy, the L/C may be deemed invalid and you might not get paid. You arrange shipping and delivery with your freight forwarder. Once the goods are loaded, you get the appropriate shipping documents from the forwarder; you use these to prove that you have fully complied with the terms of the contract. You take these documents to your bank, which sends them to the customer's bank for review. The customer's bank sends them to the customer and the customer obtains the documents that will allow the goods to be claimed. The customer's bank pays your bank, which then pays you.

ü Documentary credit

Exporters can also use sight and term documentary credits:

A documentary credit calling for a sight draft means that the exporter is entitled to receive payment on sight, i.e. upon presentation of the draft to the bank. A term documentary credit, in contrast, may allow for payments to be made over terms of 30, 60 or 90 days, or at some other specified future date.

ü Open account

Open accounts require you to ship goods and pass title to the customer before payment is made. In these cases, you're fully exposed to any credit risk associated with the customer until payment is received. In addition, because open account terms usually allow 30, 60 or 90 days (or even longer) before payment is due, you are, in fact, financing the transaction for your buyer.

Your exporting checklist…

Here's a checklist you can use to track the general progress of your exporting venture, or simply to get an overview of the entire process.

ü Planning and preparing

Whether you export goods or services, many of the following preparatory steps will be similar:

Research the market using techniques and resources described in this guide. Ask the TCS in your target market for help in assessing your market prospects and to provide you with a list of qualified contacts. Visit cities in the region and talk to potential buyers and intermediaries. Request a face-to-face briefing from an officer of the TCS in the region to discuss the latest developments in your target market. Develop a network of contacts and potential partners. Find out who are your competitors and potential allies, and who are the key importers, distributors and agents for your product or service. Develop a profile of the ideal agents and distributors; then, make a short list of the ones whose skills and experience best complement your export objectives. If exporting a service, consider the possibility of finding a local partner to represent your interests. Put together a promotional package describing your company and its products or services. Attend a regional trade fair to continue your market research, do preliminary promotion and establish contacts with potential buyers and associates. Make arrangements with key export service providers such as freight forwarders, trading houses and customs brokers.

ü  Making the deal

The following summarizes the way you arrange a deal and ship goods to your buyers. If you're a service exporter, you won't have to deal with documentation, freight forwarding, shipping or customs clearance.

Verify the prospect's credit rating. Contact other exporters who have had dealings with the prospect. Ask the TCS in your target market to provide you with information on the prospect. Verify the prospect's business profile.

ü Finalize the sale

Finalization normally begins when your sales department receives a purchase order from the buyer. You should respond with an acknowledgment of the order or a sales confirmation. Be sure to confirm the following details:

quantity payment terms shipping/trade terms transportation method price

ü Prepare a letter of credit

The process for a letter of credit (L/C) is:

The buyer issues an instruction to his or her own bank. The buyer's bank sends the L/C to your bank. Your bank sends the L/C to you.

Review the L/C carefully with your freight forwarder, banker and legal counsel. It must be consistent with your sales agreement, and you must comply with all of its provisions. Remember that an L/C pays upon receipt of correct documents, not upon successful completion of the transaction. If a name or address is misspelled, if the shipping date is wrong or if all charges are not included, you may be unable to collect.

ü Prepare other documentation

Your shipment must be accompanied by all relevant documentation, including:

commercial invoice packing slip shipping instructions certificate of origin standards documentation (if necessary) health/sanitary certificate (if necessary)

ü Freight forwarder involvement

Your freight forwarder prepares the following documents and delivers copies to you, your buyer and your commercial bank:

customs invoice consular invoices (if required) special packing or marking list insurance and certificate of insurance bill of lading

ü Shipmentü The shipment process works like this:

Your freight forwarder sends the goods to the carrier. Your customer receives all relevant documentation, allowing the shipment to clear customs. The goods clear customs at the destination entry point.

ü Collection

After the shipment has been sent:

The freight forwarder presents your bank with the L/C and all accompanying documentation. You present your bank with a sight draft (demand for payment). Your bank passes the documentation to the buyer's bank with a demand for payment. The buyer's bank accepts the documentation and lets you know when the funds will be transferred. Your bank transfers funds to your account.

 

 

STEP 9 : UNDERSTAND THE LEGAL SIDE OF INTERNATIONAL TRADE

 

 

 

 Step 9 : Understand the legal side of international trade

 

v International commerce terms (Incoterms)

To provide a common terminology for international shipping, the following Incoterms have been developed under the auspices of the International Chamber of Commerce.

Cost and freight (C&F)

The exporter pays the costs and freight necessary to get the goods to the named destination. The risk of loss or damage is assumed by the buyer once the goods are loaded at the port of embarkation.

Cost and freight (C&F)

The exporter pays the costs and freight necessary to get the goods to the named destination. The risk of loss or damage is assumed by the buyer once the goods are loaded at the port of embarkation.

Cost, insurance and freight (CIF)

The exporter pays the cost of goods, cargo and insurance plus all transportation charges to the named port of destination.

Delivered at frontier

The exporter/seller's obligations are met when the goods arrive at the frontier, but before they reach the "customs border" of the importing country named in the sales contract. The expression is commonly used when goods are carried by road or rail.

Delivered duty paid

This expression puts maximum responsibility on the seller/exporter in terms of delivering the goods, assuming the risk of damage/loss and paying duty. It is at the other extreme from delivered ex works (see below), under which the seller assumes the least responsibility.

Delivered ex quay

The exporter/seller makes the goods available to the buyer on the quay or wharf at the destination named in the sales contract. There are two types of ex quaycontracts in use: ex quay duty paid, whereby the seller incurs the liability to clear the goods for import, and ex quay duties on buyer's account, whereby the buyer assumes the responsibility.

Delivered ex ship

The exporter/seller must make the goods available to the buyer