Everyone who starts an export-import business need to be aware of export risks. The exporters can then be well informed and prepared and can hedge the risks.
Unfortunately, most of the new exporters and importers are not aware of the export risks. So, we decided to write an article, to point out some of the most serious risks. We will also show, how to hedge export risks.
Even export business has a lot of advantages in front of the local business and there are so many export business opportunities.
Main advantages in export business are as follows:
- As an exporter, you are able to get a better price than you would otherwise get in the local market.
- If you are an exporter, you are also able to sell bigger volumes to the foreign markets.
- Government supports exporters and usually, there is favorable taxation policy for exporters.
Still, there are also disadvantages, mainly occurring as an export risks. Following will give you an overview of most of them and we will also show you, how to hedge those export risks.
1. Payment risk in export business
Regarding with payments, there are many risks. We will explain all the risks regarding with the payments in export-import business.
The foreign buyer doesn’t pay you on time
Maybe you are waiting for the initial payment ( advance) payment from the foreign buyer. But they won’t make the payment on time. Then you are in trouble to pay your supplier and maybe you are not able to get the products from your supplier.
Probably you already agreed with your supplier, that you will pay to him and take the goods advance. Because your buyer won’t pay to you, then you cant pay to your supplier either.
You may even lose the business deal because your local supplier maybe gives the goods to the other buyer because he cant wait.
The buyer won’t make the balance payment at the right time.
Let’s say, you agreed, that buyer will pay 70% against the bill of lading ( B/L) copy. Sometimes, the buyer may fail to make the balance payment on the right time. Then you are in the situation, where you need to ship the goods, but you still haven’t received the balance payment.
Both export risks are very nerve-wracking because you don’t know, is the payment on the way or not. Maybe the buyer is a scammer and doesn’t pay to you at all??
Don’t worry, there are good solutions to prevent those situations, we will show you soon, how…
The foreign buyer doesn’t pay at all- one of the biggest export risks!
If the buyer just delays with the payment, this is not so bad, finally, you still will receive the money. But In the worst scenario, the buyer doesn’t pay you at all!
When the buyer fails to make the initial first payment, then you just won’t proceed his order. You cancel also your order from your supplier. It is maybe harmful to your relations with your suppliers but in most cases, you won’t get the remarkable financial loss.
But If the buyer fails to pay the balance payment, then this is the most serious case for you. Now you are in the situation, where you have been shipped the goods to the buyer, but you won’t get the rest of the money.
In this situation, you should try to cancel the shipment, if possible. If the ship already on the sea, then the best what you can do is do not ship the original export-import docs to the buyer.
If the buyer won’t get the original docs, then he is not able to get products out from his country custom.
The owner will be the company who has the original docs of the goods, in this case, exporting company.
So, in this case, you can take the goods back. But this is also costly, you need to cover the costs of the transport.
In this situation, it is better, to find a new buyer at the target destination port and let them pay you for the goods and then you can send the original docs to him.
Remember, if you won’t find the new buyer, then you need to pay for the time when your containers are on stuck on the other country shipping port. This is very costly and you need to act quickly. The more you wait, the more you lose money. Always try to find new buyers from target destination
Hedging the payment related export risks
Export payment insurance
For companies that are exporting the goods to the foreign markets, there are possible to ensure your payments. Also called trade credit insurance, this means, that in case the foreign buyer fails to pay you the money, then the insurance company will pay you. They will pay the big amount of the money what you didn’t receive from the buyer.
Usually, insurance companies agree to pay out 80-95% of the total sum of the money what you should receive. After you get the money from the insurance companies, then the insurance company will take over your claim against to the buyer who didn’t pay you.
So, the insurance company now start trying to get the money from the buyer. You no need to worry anymore.
But, ensuring the export payment also cost money. Insurance companies will make a review of your planned business transactions before they agree to ensure your payment.
There are International companies that are offering such services, example Meridian Finacial Group. Also, there are banks and government institutions that are offering the export payment insurances.
You should ask from your country appropriate export-related institutions and from your bank about it. Also, google about export credit insurances. you will find different possibilities easily and you can choose the best for you.
You need to analyze the insurance cost for you in case you use export payment insurance. Also, take into account the possibility of the risk. If you have long time buyer from a foreign country, then this insurance maybe not reasonable.
L/C (letter of credit) payment
L/C as a Letter of credit is a secure payment method that is very secure for both, for seller and buyer. In this case, the exporter and importer agree to use Letter of credit payment and then they will also agree on the conditions of the letter of credit.
Letter or credit is basically an agreement and transaction between two banks, (buyer and seller banks). In this case, Buyers bank will declare to your bank (seller bank), that it will make a certain payment to your bank behalf of the buyer, under specified conditions ( L/C conditions).
Banks will handle and review the documents and one Bank ( buyers bank), will pay to the seller Bank if all LC conditions are met.
In a letter of credit, you as a seller need to tell the buyer, that you want to use LC. Then the buyer will open the LC deposit in his banks. This means, that the buyer will pay the agreed sum of the money on the secure bank deposit or the bank froze that money in buyer account.
You, as a seller ( beneficiary of L/C) will get a notice from your bank about the opened LC for your favor.
For the seller, this means, that the money is available and you don’t need to afraid, that buyer doesn’t have money anymore.
L/C is a method, where the seller will get the deposit against when he met all the LC conditions, presented to the seller’s bank.
At first, the seller needs to give the required docs to his bank, the banker will review the docs and is convinced, that the required docs are presented and all LC conditions are met, then your bank will send the docs to the buyers Bank.
Buyer bank will review docs also, and if all is correct, the buyer side bank will make the payment of the LC sum to your Bank and your bank will pay it out to you during a specified time.
Letter of credit works based on the agreed and confirmed LC terms (contract). In LC contract, most importantly the following aspects are specified and set.
- What documents need to be presented to the buyers’ bank by supplier
- The timeline of the LC. This means, if supplier cant presents the docs at the right time, then the LC deposit is no longer available, you need take your products back paying the transport costs, also you will get your docs back.
- The sum of the LC deposit.
- The timeline, during what the buyer’s bank must pay the money out to your bank
There exist different types of letter of credits.
There exist L/C at sight and also LC with the timeline.
Also, there is Revocable and Irrevocable Letter of credit.
Seller and buyer need to agree the best solution.
But as always, this instrument has its own cost, because banks want to make money as well. Usually, the bank will take 5-7% of the total amount of the LC deposit.
Also, the banks always review your planned business and sometimes they may refuse.
Letter of credit is a good idea if you are dealing with expensive goods and your profit margins are high enough.
First, receive the payment, then ship
The very easy solution, but sometimes not acceptable by the buyer. In this Case, the exporter won’t start processing the order, when exporter receives the first initial payment, usually 30%.
Also, the exporter won’t ship the goods, before the balance payment is paid.
In this case, all the risks are on the buyer side, so its understood, why the buyer doesn’t usually accept this. But to make them accept it, we suggest asking them to come and visit you. You can show the buyer the goods ready for shipping, so they can trust you and pay the money out.
Sell through Alibaba, use Alibaba trade insurance service
If you are gold and verified member of Alibaba, then you have the option, to sell through Alibaba and have the trade assurance. Alibaba can protect both sides: buyers and sellers. This service is similar to the export payment insurance.
Alibaba also protects against other things, like bad quality, wrong quantity.
This is a reasonable solution when you are selling small amounts.
Deal only with reliable buyers and suppliers
New and fresh exporters usually won’t make a background check on the potential buyer. There are a lot of scammers and it is neccesary to conclude sufficient background check of the potential buyer.Do it, before you take negotiations seriously.
If you plan to export to Europe or some other overseas country, then always investigate the potential buyer. Ask the company registration certificate of his company. Google about them, if possible get details of the companies whom they have bought before. Then you can talk to them and ask about this buyer.
Also, make sure their financial reliability, their annual turnover. Make sure how long have they been in the business. Additionally, make sure how professional they are, take any sign of unprofessionality as a sign of risk.
If finding and validating serious buyers, then there aren’t better methods, than old-school physical visiting and meetings.
Note for importers: In case you plan to import, then we aware that about 80% of your efforts will go to find and validate he reliable suppliers to finally find the right supplier. We have a case study about how to import from China. There we explain exhaustively, how to find reliable suppliers and how to inspect them before you enter into importing business with the supplier.
Every business transaction needs to follow strictly the signed contract.
International sales-purchase contract belongs to the export documentation and needs to be well drafted and all important aspects need to be taken into consideration and set in the contract.
Also, the contract needs to be signed by authorized parties. This means, that only the persons, who have the right to present the company, need to sign the contract. Usually CEO,s, General managers, Owners, Directors.
Sometimes, it is possible to take one step further and visit the notary to officially proof the contract. In this case, the notary will make sure, that the persons are who they claim they are and also make sure the persons have the right to sign the contract.
In some countries, there aren’t notaries, an example in China. But In Europe and USA, it is possible. But usually this is time and money consuming and the parties may not to agree on this.
2. Damage/destruction of the goods during the freight
Damage of the goods.
If you are exporting goods to the overseas, then you need to know very well, how your goods remain its quality during the freight. Based on this you need to choose the correct shipping method and packing, conditions. From here come another export risks.
For some goods, like fruits, vegetable, food products, the special conditions are crucial. If you won’t organize needed conditions, then your goods can be damaged, if they arrive to the buyer.
Below is one case example of my own business
Years ago, I exported berries and fruits from Europe to Hongkong. I got an expensive experience what this export risk really means.
One container of frozen berries, what I sent from Spain to the Hongkong turned totally ineligible for human consumption, after they arrived in Hongkong.
It turned out, that the cooling device of the sea container where broken, so the frozen berries meltdown during the sea freight.
At that time, I didn’t insurance that load, so I lost all of it. As an extra cost, I needed to destroy the berries on the Hongkong. This was an expensive experience, but I learned a lot from this.
This kind of things can happen with all kinds of fruits, vegetables, meat, and foodstuff. In the worst case, you can lose all the load. If the damage is not so big, then you can lower the price for the buyer, if he accepts it.
In either case, every exporter needs to know that there exists this kind of risk.
Special conditions like temperature and ventilation are crucial for food-related products. But it is also possible, that products, like machines, or some kind of raw material will get damaged. Usually, this is because of the poor packing and handling of the goods.
Total lost of the goods
Ships sink or can be overtaken by pirates, airplanes can crash sometimes, trains can have terrible accidents. These export risks are not very probable, but those still exist nowadays. If some of those export risks come true, then you will lose all the goods and you cant do nothing anymore.
This kind of risk is becoming more important and valid, if you are exporting very expensive goods, in very big volumes and very often.
Hedging the damage, destruction related export risks
If with payment related export risks, you can really hedge the risk, example with LC payments. But with damage and destruction, it is most cases impossible to hedge the risks. Here you can mostly prepare for the risk and make sure you won’t get the financial loss if the risk comes true.
Insurance your shipment
All the main shipping companies like DHL, TNT, Maersk, UPS etc are offering the insurance services as well. This means, that you need to buy the insurance policy and then your goods are all covered in case something happens with this during the freight.
Different companies offer different types of freight insurances for your goods and for food-related products, the cost can be high and conditions very strict.
We strongly recommend, do not save cost from insurance.
Work with internationally well-known shipping companies
Even, sometimes the DHL can be expensive, then if you are moving expensive goods, it is reasonable to spend a little bit more on the freight. At least you know your goods are on the good hands.
International well-known shipping companies are also providing accurate tracking service and very professional client service. This will also give the safe feeling to your buyer.
As an additional note, to this risk, we also suggest dealing with this kind of products that are stable, temperature resistant.
3. Export risks related to custom and documentation
If you are exporting or importing, then you need to deal with customs and export documentation and procedures.
If you don’t have the needed documents neccesary for your country custom, then you may be prohibited to export the goods out from your country.
Same with importing, if you will get the goods from your supplier, but an example, the supplier won’t send you the specific document, then the custom may won’t let you clear the custom.
Also, some products are prohibited or restricted to export out from your country. Example India restricts and prohibits the export of the energy-related products because India has increased energy demand.
Also, some products may be restricted for import into your country.
All these restrictions and problems with documents can mean serious cost for exporters and importers, so they are export risks.
Hedging the custom and documentation related export risk
For exporters and importers, before you are signing contracts and closing the deals, you need to make sure all the documents required together with your products.
Secondly, you need to know are there any restrictions or limitations related to your products or with the countries what you are dealing with.