Payment for exporting is a complicated process and can take one of various forms. These are:
- Payment in advance. You are unlikely to be in this position when starting out, depending on your bargaining position.
- A documentary letter of credit (l/c) from the bank. The most common form of export payment, this is a guarantee by the bank that they will pay the exporter for the goods delivered provided the exporter complies with the terms and conditions laid down in the l/c. Compliance involves, among other things, producing certain documents (another reason why your paperwork has to be in order).
- A documentary collection. Only when the importer accepts a bill of exchange (which is done via payment), will an overseas bank acting on your bank’s behalf release the documentation necessary for them to take possession of the imported goods. This enables you to protect goods until they are effectively paid for.
- Open account. You only invoice the buyer after you have shipped the goods. This option offers the least protection and should only be carried out with a trusted party.
Minimising The Risk Of Trade
The “how-to –be- an- entrepreneur” handbooks are full of tips and advice to teach new business enthusiasts helpful tricks for taking calculated risks. Follow these tips to minimise the risk in trade.
1. Plan Ahead
One doesn’t discover new lands without consenting to lose sight of the shore for a very long time. – Andre Gide
If you are in search of new lands to expand your business abroad, it’s a good idea to start the process of evaluating overseas markets as soon as possible.
A vital element in ensuring success is to assess your readiness and commitment to grow internationally before you get started.
Many businesses fail to plan. They rush in where angels fear to tread.
Come up with an international expansion strategy that clearly states your business goals.
Part of the strategy must include thorough market research. Questions to ask are:
- Is there a need for your product?
- Do people like what you are selling?
- Should you make changes to your existing products?
- Are there distributors you can partner with to get your product on shelves as soon as possible? Here are a few tips in how to build trust with foreign suppliers.
2. Know Your Incoterms
If you are not willing to risk the unusual, you will have to settle for the ordinary. – Jim Rohn
When global companies enter into contracts to buy and sell goods they are free to negotiate specific terms.
The Incoterms (international commercial terms) determine who pays the cost of each transaction segment, who is responsible for the loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment.
Many traders are under the misconception that incoterms rules refer to the passing of title/ownership, when in fact it refers to the passing of risk and the dividing of costs during the physical movement of goods.
In order to minimise one’s risk, importers and exporters should familiarise themselves with Incoterms. Read more about it here.
3. Anticipate Extra Costs
The road to success is always under construction. – Arnold Palmer
Most first-time importers make the mistake of not anticipating extra costs and therefore they’re not completely prepared for the financial implications of importing products to South Africa.
It will be wise to engage the services of a freight forwarding or customs broker to assist you with understanding the trade terms of an agreement, and to talk to your bank to understand the financial implications of the order you are thinking of placing.
Also, it will also be helpful to keep the following pitfalls in mind when calculating importing costs:
- Ensure you use the correct calculations for VAT or Import duties
- Ensure you have cargo insurance
- Ensure you have the right permits to clear goods at customs so that you do not pay storage fees.
If you follow these guidelines it will protect you from taking unnecessary risks that might be counter-productive. It will also create a watertight structure to expand your import and export business.
Find more original resources, leading-edge training and assistance with customs licenses and foreign exchange on Trade Logistics.
How To Make The Most Of The Falling Rand By Exporting
The Rand is currently at its lowest point in history and analysts are not optimistic about it strengthening in the near future. If you have a quality product and production capacity this signifies an opportune time to start or boost export sales.
A weak Rand means that South African products can either compete at more competitive prices in international markets or, if priced at the market rate in an international currency, more profit can be obtained from a sale.
With the vast enhancements in global communications, ease of moving goods, growth of internet trading portals and increase in English literacy global trade is becoming easier than ever before. Below are some ways to start or grow exports.
We recommend: How to Accurately Cost an Imported Product
Create a marketing strategy tailored to the international market targeted
For companies new to exporting it is advisable to start with a single product and a specific target market from where you can expand.
Spend some time researching the country/ies that you intend to export to. Research your competition. Are there local suppliers in the country? At what prices are comparable products selling both from local supplier and on the international market.
Does your product have any unique properties that may appeal to the target market you have chosen?
When creating your marketing material and strategy take into account the culture, language, ethics and religion of the local population and tailor your approach to appeal to them.
Marketing strategies to find buyers
An effective international marketing strategy may include:
- Promoting products on established internet based business to business trade portals.
- Attending international trade shows where you may showcase your product, arrange to meet with potential buyers attending the show or conduct market research.
- Identify and target potential buyers in the proposed country of export directly. This can be done through making use of an agent or business partner in that country, by doing local internet searches in that country or through contacting trade associations such as the local chamber of commerce.
- Use social media platforms such as LinkedIn to gain contacts in a targeted country.
Make use of export grants and trade agreements arranged by the South African government
As part of their efforts to boost the South African economy and support GDP growth the South African government has a number strategies in place to support export sales.
One of these strategies is the export grants available through the Department of Trade and Industry (DTI). Financial support is given to exporters to use on market research, trade missions, attending trade shows and hosting international buyers.
Costs covered by the grants may include exhibition fees, air tickets and a daily expenditure allowance whilst on an international marketing trip. More information on the DTI grants is available here.
South Africa is also part of a number of trade agreements that allow exporters to sell their goods with little or no duty tax being charged to the international buyer.
This lowers costs for the buyer and makes the goods more attractive. The most notable trade agreements are with a number of Southern African and European countries.
We recommend: Freight Quotes: How to Interpret and Compare Them
In order to qualify for the reduction in import duty each export to these countries needs to be accompanies with the appropriate South African certificate of origin. More information on trade agreements is available here.
Breaking into a foreign market may take longer than generating local sales, however the effort spent establishing an international client base may support your business for years and serve as a buffer against a drop in the South African economy.
5 Worst International Trade Nightmares to Avoid
Below are 5 common costly mistakes regularly made by international traders, make sure it does not happen to you.
Millions of people move cargo internationally seamlessly every day, however when things go wrong it is often very expensive. Costly mistakes, although easily avoidable, typically catch the uninformed.
1. Not having the correct permit for regulated goods can result in high storage fees or termination of goods
Certain goods are closely regulated by customs. In order to clear these goods from customs a permit may be required. Some permits can be obtained in a few days, but some take months.
Cargo that is not cleared by customs accumulates additional storage charges which could amount to thousands of Rands. Importers who choose not to pay the storage fees can either have the cargo terminated or sent back to the supplier. A common example is health supplements. Customs requires clearance from the Medical Control Council (MCC) before health supplements are allowed into the country.
Under the latest MCC procedures this could take up to 5 years. Another common example is a cellphones. Cellphones need to be approved for use on South African air frequencies, this could take months.
To avoid this unpleasant surprise, find out whether any special permits are required before you order and pay for your goods. You can find out for free at the Trade Logistics offices or look it up yourself on the Trade Logistics calculator’s page.
2. Payment of goods to a fake international supplier
International trade through the internet has grown at phenomenal rate. A negative factor to take into account when choosing your supplier online is that the only information available online is the positive, beneficial information that the supplier wants you to see.
Beware of fake companies that take your deposit and disappear. Avoid this by only sourcing suppliers on trust worthy trading portals who screen the suppliers beforehand. You can also use escrow facilities, a letter of credit or a documentary bank collection to lower your risk.
3. Supplier ships wrong or lower quality product
The product you see in the tradeshow is not what is delivered. The 5 cm thick wooden table slowly thins out to 4.8cm, 4.6cm, 4.4cm with each new order.
Not calculating the VAT and import duties, or not taking into account all the freight costs including inland transport cost and port fees can significantly influence the final landed cost of your cargo, eroding your profits.
For more information on how to cost an imported product read our last month’s entrepreneur magazine article on “How to cost an imported product” or our blog First-Time Importer- How not to lose money” blog and our calculating VAT and duty manual.
5. If the ship sinks and you have no insurance you are liable to pay the cost of the ship
Most importers and exporters are not aware that part of the terms and conditions included when you send cargo by sea is that the cargo owners are also liable to cover any damage to the ship that occurs on the journey.
The proportion of liability is equal to the proportion of cargo a trader has on the ship. Luckily the chance of the ship sinking is very low! But be aware of this potential additional risk when deciding on freight insurance.
Knowledge is power when it comes to International Trade. It may seem that there is so much information out there that it is hard to know enough.
Luckily South Africa’s international trade industry has a number of very experienced individuals who you can get trusted advice from, ensuring that your business is not caught in a costly mistake.