Export and Import business is very lucrative and profitable business and it serves interest of the exporter as well as of the Nation but the risk attached to it needs to be considered and taken care off wisely.
The business is nothing but a risk. No pain, there is no gain, no risk, there is no return. There is a risk, there is return. Risks and returns are always correlated with each other.
I have lost my own hard earned money over a period of time while trying for exports during a span of last 6 years due to many reasons. Top one of them is lack of experience with no guidance.
Initially I was much excited dreaming to be millionaire and billionaire overnight but it did not happen and I ended up loosing a significant amount of money.
After few days, I got frustrated and started thinking to give up.
However I continued and managed to control my frustration somehow and went on travelling with no clue.
In the beginning, I was running behind each and every product if asked by any buyer to export them. While doing this, I hardly exported one or two products and ended up with no profit since the cost for researching new product, travelling to meet and coordination with new manufacturers each time outweighed the profits realized.
latter on I realized, this is not a correct method to pursue. It took lot of time for me to decide a particular product to work on. Choosing an appropriate product and targeting the same for export is very important.
Now the plant made 6 years back started growing up and giving us fruits and investments started coming back and I feel if i had given up in the middle, I would have lost all my investments.
There are two way to learn;
i- By own experience that comes over a period of time by investing significant amount of time and money. This is a riskiest move but gets us a real time exposure.
ii- By other`s experience that gets us nice learning with time investments and few penny if required. This is the safest mode of experiencing to explore under anyone`s guidance.
In the first case, you might loose lot of money as I did.
In the second case, you can learn lot with minimal risk.
If you want to become an entrepreneur, you have to be prepared to take risk a lot in the entire process of the business and you need to be careful all the time. I will share my experience as well acquired during my own shipments.
At not a single point in the entire journey of a business, you can perfectly say, now the risk is gone , what all you can do is to mitigate the risk by experience earned over a period of time or by learning with other`s experience and can follow some one to get guidance. As longer as you are into business, you have to be cautious.
We need to understand risks involved in export and import business. There is strong relationship between risk and return as depicted below;
Here major risks faced by exporters & importers are numerated;
- Credit risk
- Poor quality risk
- Transportation and logistic risks
- Political risks
- Natural risks
- Exchange rate risks
- Cultural and Language risks
The exporter faces many challenges and one of them is to get buyer whom he can start exporting to. Once it is set, the next challenge is payment terms. There are three popular payments terms;
i- Advance – This is preferred and safe payment mode you need to try your best to have it, although getting advance from new client is much more difficult. This type of payment method will reduce the payment risk and will give you an edge to handle cash liquidity as well.
An expert businessman always tries to do business on other`s money, the advance payment would be the best example for this..
I exported my first consignment to Saudi Arabia and luckily I got 100% advance payment and completed my shipment as per the scheduled time. Advance payment is the best payment method and 100% in favor of exporter and high risk for importers. This fact you also need to know that the business against advance payment is only 1%.
ii- Letter of credit (LC) – this is a documentary letter of credit issued by bank of the buyer to the exporter with terms and conditions laid down in the agreement approved by both the parties.
Once those terms and agreement are met while doing shipments, the exporter gets payment by negotiating that LC with Bank. On the acceptance of the LC, few points need to be kept in mind that the LC should be irrevocable, confirmed and top issuing banks.
Although this arrangement is safe for both the parties but the exporter needs cash for raw material to prepare finished goods for export till the shipment happens.
Since the exporter is always in cash crunch, he/she is pressurized to arrange cash and has to bear charges of issuance of LC which will be an extra burden above cost of goods and shipments. The business in LC happens only 20%.
On behalf of my client, I was sourcing teak wood from Ghana through a company based in Dubai and we issued him LC of 1.5 crore with 90 days validity and handed it to the supplier.
Even after 90 days, the supplier did not supply the goods and requested us to extend the LC for one month more, we did the same but again he failed to supply and the LC got expired. We ended up with losses of LC charges amounting to Rs 3 lac and time invested in for 4 months.
Suppose, if we had given him an advance, we would have lost our entire amount. This is the reason, Payment through LC is safe specially for importers. If you are an importer, this type of arrangement is highly recommended.
iii- Payment against document – the payment is received from the client against the document issued to. The buyer – importer will receive the original document once he makes the full payment to the exporter.
In this arrangement, an exporter needs to wait for the payment till the shipment reaches at the destination port. The exporter also needs cash to handle all activities related to shipments.
While I am writing this article, one of our shipment with 2 nos of Dynapac soil compactors – CA 255D for Vietnam is in transit and waiting eagerly and impatiently for the payment to come since a sizable amount of our funds is blocked in this payment terms against document.
This arrangement is exercised most and frequent as payment terms and it does not attract an extra charges as well as seen in issuance of LC. This is recommended for those exporters who are already doing business with old clients and have developed trust to some extent.
iv- Credit – This is the worst kind of payment for exporter and the best for importer. Goods are sold to the buyer on credit payment for 30 days, 60 days or 90 days.
This kind of payment is never recommended until or unless you have developed very strong business relationship with your client. We have bitter experience in this arrangement. We have done a multiple shipments to our Malaysian client for $ 85000 and got the payment and the last shipment for $ 5000 we did on credit for 15-20 days but we have not yet received even after 5 months from now.
Before you avail this kind of arrangement as payment terms. You should check creditworthiness of the customer and there are many commercial agencies that can do on your behalf. ( more on this latter in a new blog)
Poor quality risk
Many suppliers ship substandard and low quality of goods. Sometimes, they ship different goods altogether as it happens to one of my friend, he imported copper from china and the shipment was received in Dubai with block of bricks. It was a big loss.
You need to have an eye on the quality of goods you have finalized either you get sample before you get shipments or you need to be present at the loading port to minimize such risks or you can ask third party agency to have quality check and issue certificate for it like SGS etc.
Transportation and logistic risks
The consignment travels from one place to another and reaches at the client place. The goods being shipped to the importer is exposed to the risk for damages while loading, unloading and risk for sinking ship in the sea with the goods. In between, there is alone discussion when the risk will get transferred to the buyer`s account. The risk is transferred to the buyer based on the contract and INCOTERMS. There are two main INCOMTERMS and famous which we can cover it here;
FOB means Free on Board where exporter arranges for goods to be transported to the port loaded on ship and the importer needs to pay freight, insurance and unloading at the destination port. In this incoterm, once the goods are loaded to ship, the risk is transferred to the buyer and ownership depends on bill of lading ( the same will be covered in a separate blog on INCOTERM)
CNF / CIF- In both the terms, the difference is only insurance. CNF means Cost and Freight arranged by the exporter and Insurance arranged by the importer and CIF means Cost, Insurance and Freight – all arranged by the exporter. In this case, exporter needs to arrange FOB plus freight in CNF and insurance as well in CIF but the risk is transferred to buyer once the goods is loaded to the ship as in FOB.
Apart from these two, there are various INCOTERMS for export and import to have delivery contracts which be elaborated in separate blog.
As regards to the transfer of ownership, it differs a bit from transfer of risk that will be covered in next blog on INCOTERMS.
There are various risks involved politically in export and import. Most popular risk is policy change when a government gets changed. You need to have an eye on export & import policies of your target countries where you export to and import from to get updated of any change occurring and take care of it well in advance to reduce the political risk.
By measuring and getting updates on political situation on export and import, the risk could be managed and controlled to some extent.
Natural disaster such as an earthquake, flood and hurricane or any other natural calamities can cause a great risk damaging goods exported or imported and will end up affecting export and import business lot. Such risk can not be controlled and eliminated. Thus exporters are highly advised to ensure a force majeure clause in the export contracts.
Exchange rate risks
The most important thing in export and import is Forex. A slight change in foreign currency exchange rate will impact lot on the profit of exporters and importers.
The price is always freezed in advance and the product is delivered later. Exchange rate on delivery date differs from the date the price fixed.
It could go up and go down possibly;
Suppose if you have made of an export for 1000 US dollar to your client. The price agreed between both the parties at 5th August 2017 and the rate of 1 USD was Rs 64.07 so the amount of 1000 USD was expected to be Rs 64,070/- and the payment received at the time of delivery on 5th September 2017 and the rate of 1 US dollar was Rs 64.11 and the total amount realized was Rs 64,110.
The exporter will earn extra Rs 40 ( 64,110-64040) than expected amount to receive and to the contrary, if the rate goes down, the exporter’s profit will get reduced and sometimes the exchange rate fluctuations eat up exporter’s entire profit and some loss of capital invested in. Similarly, importers fall in such losses and profits due to change in foreign exchange rates.
To avoid this risk, you can start hedging your currencies. ( Hedging currencies will be elaborated in new blog)
Cultural and Language risks
Once you start trying for export and import, you will explore various cultures and different languages across the globe.
Becoming familiar with buyer country`s culture will give you an edge over your competitor and scale your business. Speaking with the client in his local language will get you one step ahead towards closure of the deal.
There are many business getting spoiled due to lack of understanding buyers` language and culture.
Meeting and greeting will be completely different from one country to another that needs to be well taken care off..
Shaking hands with girls in United states and European countries are considered to be good while in gulf countries, it will be very awkward and embarrassing if hands are shaken off with girls.
Communication gap due to lack of understanding local language will ruin the entire business as well. Thus understanding the culture and local language plays a very vital role in the success of a business.
Apart form this, there are various risks involved in export and import business.
As beginner, you need to understand the procedure of exports and documents involved in. you can read introduction to export here and you also need to know what are top products you can choose to export. For this, you can access here Top 10 export products from India you must know. You are also recommended to have knowledge of tax updates and its impacts on exports. GST newly implemented in India will impact exporters. For more, read it here.
Doing export is most desired to widen scope of our business and to explore the world for our products. It will benefit us as well our country.
We need to learn how to minimize the risk associated with it as mentioned here and other risks also to accomplish our goals and to be in the business for a longer time.
Learning with own experience is desired but riskiest and learning with other`s experience under someone`s guidance is recommended for beginners.
You need to be open to learn always from all the aspects and keep assessing potential risks of any kind. Be safe and do export from your heart.
If you need further info, please leave your comments.