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How should importers manage risk
Q. How should
importers manage risk?
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A. Managing the risk when importing.
Supplier:
- The importer should use all available information to satisfy himself
regarding the bona fides of the supplier. Sources of information include:
- credit reference agencies, trade journals, published accounts,
company registry offices, other customers of the supplier, trade officers in
embassies.
- If there is any doubt regarding the standing of the supplier, an
alternative supply source should be considered.
Supplier’s
country:
- This risk should be considered first, even before that of the
supplier. The ability of any supplier to fulfil their contractual obligations
will be affected by the political and economic events in their country. A low
cost supplier in a high risk country may seem attractive but price should only
be one factor influencing any business decision.
- There are many sources of information on country issues, including:
newspapers, news agencies, economic journals, credit agencies, embassies and
export support agencies.
Quality of
goods:
- Ideally, importers would like to receive and inspect their goods
before having to pay for them. Suppliers, on the other hand, would like to
receive payment immediately upon shipment.
- The risks here can be addressed when assessing the supplier risks. If
any concerns remain the importer can arrange to have goods independently
inspected prior to shipment. Alternatively, the sales contract may indicate
that the goods must conform to some independent standards e.g. a British
Standard Number.
Damage
to goods in transit:
- This risk is easy to protect against, as there is a well developed
insurance market covering the risk of damage to goods in transit. Importers
need to establish at the outset whether they or their suppliers are responsible
for arranging the transit insurance. The responsibility of the parties in
relation to insurance are set out in the International Contract
Terms(INCOTERMS) published by the International Chamber of Commerce, Paris.
- Importers should consult their insurance broker or company for
advice.
Credit:
- Trade credit can be a low cost source of finance. The ability to
purchase goods on credit can greatly assist an importer in the management of
their cashflow. Trade credit permits the importer to receive the goods and
resell them or use them in their manufacturing processes before having to pay
the supplier. In many cases, trade credit may be cheaper than borrowing from a
bank to pay for the supplies immediately. Inability to access trade credit may
pose a risk to the importer’s financial survival.
- Suppliers will only grant credit to importers that are considered
financially sound and are located in economies that are politically and
economically stable. Importers may be able to obtain access to trade through
the payment mechanism they agree with the supplier. It may cost less for an
importer to use their bank facilities to issue a Letter of Credit guaranteeing
payment to the supplier at some future date, than to utilise their overdraft
facility and pay for the goods at the time of shipment. An offer to accept
Bills of Exchange drawn on the importer by the buyer for payment at some future
date may also encourage suppliers to grant credit terms.
Payment:
- The importer has various options in relation to payment that can be
agreed with the supplier:
Payment in advance:
- The importer agrees to pay the exporter prior to the goods being
shipped. Funds are sent to the supplier by telegraphic methods through the
banking system or directly by bank draft to the supplier. The importer is
exposed fully to the performance risk of the supplier.
Letter of Credit:
- The importer arranges for their bank to issue a Letter of Credit(LC)
on their behalf in favour of the supplier. The LC is a conditional guarantee of
payment from the importer’s bank to the supplier. The LC is paid by the
importer’s bank once they receive the shipping documents evidencing the
shipment of the goods by the supplier. The documents, against which payment is
made, are agreed between the importer and supplier at the time of signing the
sales contract. This mechanism reduces the importer’s exposure to the
performance risk of the supplier, as they know that their bank will only pay
the supplier against documentary evidence of shipment of the goods.
Documentary Collections:
- The importer agrees with the supplier that payment will be made upon
receipt of the shipping documents at the counters of their bank. The
importer’s bank will act as a collecting agent for the supplier and will
only release the shipping documents to the importer against their immediate
payment or undertaking to pay at a determined future date. Documentary
collections often use a Bill of Exchange to evidence the demand for payment on
the importer and to evidence the importer’s agreement to pay at a
determined future date. The importer is not exposed to the performance risk of
the supplier as they will only have to pay or commit to paying for goods upon
receipt of the relative shipping documents.
Open
Account:
- The importer agrees to pay the supplier by telegraphic means or by
bank draft at an agreed date after shipment of the goods. The importer can
receive the goods without giving any commitment to pay, other than their
contractual liability under the sales contract. The importer has no exposure to
the performance risk of the supplier.
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