Managing the risks of importing
Although sourcing products globally can lower costs for buyers and make them more competitive, the financial consequences can be acute when dealing with unknown foreign markets. Noorhayati Han, Trade and Supply Chain, HSBC, Brunei discusses some tips on managing risks for importers.
Gather as much information on the supplier’s business environment as possible Understanding the culture of a country, including the un-stated business rules, can make all the difference when trying to negotiate a favourable contract. Use publically available market research to find out about the supplier’s country’s politics, economy, culture and business environment. Armed with this information, an importer will be less likely to experience unexpected problems. Partnering with an international bank that has offices in the importer’s country as well as the seller’s country can be advantageous since the bank will have native language speaking staff in the seller’s country and understands the local business culture.
Assess the reliability of the supplier
As an importer, it is important to deal with suppliers trusted to deliver the right quality and quantity as well as on time. To help evaluate a supplier’s capabilities, an importer may want to consider the suppliers’ work systems. What are their service standards and are their working practices ethical? Also checking where the raw materials come from and if the supplier outsources can be very telling indicators. An importer should know the reputation of its supplier as it will affect their reputation as well.
Minimize the impact of import delivery problems The greater the distance imported goods are travelling and the more fragile or perishable they are, the higher the risk that the goods could be lost in transit or damaged.An importer should make sure there is a clear contract by using internationally accepted Incoterms/ Trade Terms for deliveries. Making sure the right insurance is in place will also reduce transit-associated risks. Banks focusing on international trade can assist with this type of insurance. Clearing imports through customs may cause delays if the right paperwork is not in place. Using an import agent or a freight forwarder who has the right knowledge to handle customs clearance is an option to help expedite this process.
Keep proper records
Businesses should ensure that the whole import cycle from the purchase order to goods’
delivery is properly documented. In the event any conflicts arise, they can be easily resolved if there is evidence of what terms were agreed. Importers should conduct detailed and candid discussions with their suppliers about terms of payments early on. It is also a worthwhile investment to obtain legal advice to ensure the exporter’s interests are protected and that all parties can reasonably fulfill conditions.
Be aware of payment implications
If goods are paid for in advance, there is a risk of the goods never arriving. Recovering funds paid or getting compensation can be very time-consuming and expensive. Often it may prove even impossible. Using suitable payment methods can protect the importer from this risk. Asking for credit terms from a supplier or if a supplier prefers, use documentary collection or documentary credit which are processed through banks. The latter of the two are more secure as they offer protection to both buyer and seller globally. A bank knowledgeable in international trade will be able to offer advice on the best methods of payments for use in different scenarios. Different payment methods also affect the timing of payments. Before agreeing on contract terms, an importer should understand how the chosen payment method will affect their cash flow.
Be prepared to deal in foreign currencies An importer has to assess the cost and risk of dealing in foreign currencies. When trading in a foreign currency, an importer might face higher costs if the foreign currency becomes stronger and often suppliers will not agree to trade in the importer’s currency. Fortunately, there are more ways than ever for importers to manage that risk cost effectively. One of the best ways is to arrange a foreign exchange contract. This allows the importer to buy or sell a specific amount of foreign currency at a certain rate on or before a certain date, therefore protecting the business against future currency fluctuations.
Above all, after goods have been ordered, managing days payable outstanding should be an importer’s top priority. How quickly payment is made will depend on the method in which the payment was made and how prepared the receiving bank is to process it. Banks offer a range of payment options for businesses. Frank dialogue with a bank is crucial – for importers or buyers – in order to identify the right solutions, from financing to risk management to payments. With the right banking structure in place, cash flow is more predictable, financing decisions are more informed and risks associated with international trade are minimized.