Getting Started in International Trade

Who is this briefing for?

You should read this briefing if you are a company, especially an

SME (small to medium sized enterprise) that is:-

• looking to expand your business

• searching for new markets

Most enterprises go through a well defined and recognised business

cycle that starts with building a presence in the marketplace,
through developing products (or services) and a customer base to
establishing a robust, sustainable domestic market. When you reach
the final stage of business development you may be thinking about
setting your horizons further afield. When this happens you could be
ready for your first venture into the global marketplace.

What does this briefing tell me?

We aim to help you take the first steps in the export process and
exploit the opportunities of international trading. In a simple
checklist format, we will give you important information about
developing an export strategy, the business issues you need to
consider and where to go for help.

Introduction

International trade is more complex than domestic trade for two

reasons. Firstly, the number of parties involved is greater. These
include Customs and other government authorities, banks and
financial services, insurers, export services providers and
international carriers as well as you and your customer. Secondly,
the distances involved, differences in business practices, culture,
language and currency complicate the process and require you to
provide accurate and complete information at the right time to the
right person. Getting both the information flows and export
administration process right the first time has four benefits:

• speedy delivery of goods

• quicker payment

• reduced costs

• satisfied customers

Export Strategy

To ensure your first venture into exporting is a success you must

have an effective export plan. When developing your strategy you
should use all available tools and techniques to establish best
international trading practice. Some of the components that build a
convincing and dynamic export plan are:

• commitment from senior management

• market research, including the identification of

national standards or import restrictions

• adopting a professional approach to international

trading, including a training programme for your
export staff (both sales and marketing, and physical
distribution)
• an export price that includes the additional costs of
exporting
 • your terms of trade, including delivery term and
payment method

• selling in the local currency and invoicing in the local

language

Your strategy should aim to get your product or service to the

marketplace without involving any additional activity on your
customer's part. Transparency of supply will assure your customer
that:

• your product is as easy to acquire as those produced

locally - good

• your product is more easily available - better

• your product is more readily delivered - even better

• your product is lower in cost - best

Commitment

Successful exporters appreciate that winning new overseas

customers can be a lengthy process. You will need a sustained effort
to develop and maintain relationships, research markets and acquire
the specialist skills necessary to trade internationally. Exporting
must be viewed as a long-term commitment and not as a short-term
"fix" for any domestic trading difficulties.

Planning is the key element of commitment. Once you have

targeted a particular export market, the emphasis should be on
acquiring a deep understanding of that market - how to conduct
business, the requirements of potential customers, the competition
and available channels of distribution. Using the resources of the
Department of Trade & Industry (DTI) together with the trade
promotion work of overseas posts, Business Links, other
government departments and specialist trade service providers will
help you build an effective export strategy.

Documents & Procedures

Export success requires you to master the international trade

process, especially documentation. Using internationally agreed
trade documents and training your staff to prepare them correctly
will give you a competitive edge in overseas markets and improve
the management of your credit and payment processes.

The Market

Research

The first thing you will want to know when researching a new market
is the potential for sales of your product. Today it is possible to
conduct valuable research from the comfort of your office desk due
to the large number of resources available over the Internet. The
DTI, for example, provides vital information to help you build up an
accurate picture of your target market. Details can be found at
http://www.uktradeinvest.gov.uk/information_centre/home/welcome/
index.shtml

A visit to the market itself is also essential. This will allow you to
assess the competition from locally produced products and other
exporters already in the market. With this information you will be
able to gauge whether your product will sell or will need to be
adapted to suit local tastes, such as price and even style or colour!
Again the DTI offers a "First Time Visit Package" service at low cost
to the exporter. Details are available from
http://www.uktradeinvest.gov.uk/first_time/exportexplorer/overview/
overview.shtml
A free sales leads service is also available from the DTI. This service
can help you research the sales opportunities for your product.
Register at
http://www.tradeuk.com/lead_search/plsql/ned_amend.search

Risks

Financial Risk

When you have established whether your product will sell overseas
and have identified the most effective route to potential customers,
it is worth spending some time examining the financial risk in your
chosen market. While it is probably obvious to undertake a credit
check on your customers, it is easy to overlook other factors that
could have an important bearing on first winning the business and
then getting paid.

Foreign Exchange Risk

When dealing in your customer's currency it is possible for the

exchange rate to move between the quotation date and the date of
settlement. In a seller's market, you may eliminate Foreign
Exchange Risk by quoting in sterling. In a buyer's market, however,
your competitors may be prepared to invoice in the customer's
currency as an inducement to buy and you may be forced to follow
suit.

If you are dealing in convertible currencies you can enter into

forward exchange contracts with your banks to fix the amount of
sterling you will receive when payment is made in foreign currency.

See SITPRO's separate briefing on Managing the Risks of

International Trade.
Country and Customer Risk

There are risks associated with both the country to which you are
exporting and your customers within that country. These can be
summarised as:

Target Country Risks

• Foreign Exchange controls which prevent the release

and transfer of funds.

• Import restrictions imposed after the contract has

been signed which prevent the execution of the
contract.
• Political events or economic measures that prevent
or delay the transfer of payment.

• Instability of the banking system - collapses of

banking systems in third world countries are not
uncommon.
• War or civil unrest.

• Natural disasters.

Customer Risks

• The identity of your customer - is he solvent, does

he have a trading history, does he own the premises
from which he is trading?
• The Credit Rating of your customer - even in a low-
risk country, customers may be a high risk to you. It
is worth doing extra checks for peace of mind.
• Non-payment - make sure you take out Export Credit
Insurance for added protection, even in low-risk
countries.
Quotation

In essence, quoting for business in overseas markets is no different

from quoting for business in the domestic market. Typically, the
costs to include in quotation are:

• Costs of raw materials - include all components,

labelling and packing costs.

• Manufacturing costs - include all production costs,

particularly labour costs.

• Overheads - running costs, depreciation, rent,

utilities and transport costs.

• Profit margin - this may vary depending on whether

you are trading in a buyer's or seller's market. Profit
margins may also be affected by the flexibility of
demand for your product (the more flexible the
demand, the greater the possibility of increasing
sales - but at the right price).

Delivering the Goods

Incoterms

An important consideration at quotation stage is the use of a

delivery term (Incoterm). A common Incoterm is EXW (ex-works)
where the obligation for collection of goods and responsibility for
export and import procedures is solely with your customer. At the
opposite end of the spectrum would be DDP (delivery duty paid).
Here the onus is on you as the supplier to provide carriage to a
named place of destination and to be responsible for all export and
import clearances, including the payment of local duties and taxes.
For example, if you have quoted £10,000 EXW but the signed
contract stipulates £10,000 DDP Hong Kong, you will find yourself
liable for freight costs, responsible for all export and import
paperwork and the payment of appropriate import duties. If you
have not accounted for this you will soon see a decrease in your
profit margin or could even suffer a loss!

See SITPRO's separate briefings on Incoterms and a Checklist for

their use.

Payment

Methods

Any exporter will wish to minimise the credit risk, so any method of
payment you agree should be appropriate to the risks you run. The
main factors affecting payment terms you would wish to consider
are:

• Your own cash-flow situation - this will decide the

credit terms you are willing to offer your customer.

• The payment terms acceptable in your customer's

country, e.g. a Letter of Credit for Nigeria, open
account trading for Northern Europe.
• The bank charges involved, particularly where small
quantities of a product are involved. Profit margins
can quickly be eroded.
• The shelf-life of your product - you will want to avoid
offering a credit period which is longer than the life
of your product.
• What are your competitors offering? If they are
trading on an open account basis you are likely to
have to do likewise in order to break into the
market.
 The methods of payment available, starting with the most secure,
are:

LOW RISK

HIGH RISK

 Advance Payment - ensures that payment is cleared before the goods

are shipped. A bank transfer is the quickest method of clearing funds.

 Letters of Credit these can be unconfirmed, but are much safer if

confirmed by a UK bank and should be irrevocable to carry real safety.
To ensure payment you must comply strictly with the documentary
requirements of the credit. See SITPRO's separate briefing on Letters
of Credit - An Introduction.

 Documentary Collection - this is raised by the exporter and made out

to the customer's bank. It is then sent to the customer for acceptance
and can be avalised (guaranteed) by the bank for additional safety.

 Open Account - credit terms can be 30, 60 days or more. This method
of payment is recommended only when none of the above methods
are suitable. Payments should be by bank transfer rather than cheque
that could take months to clear

Money Transfers
 • SWIFT Inter-Bank transfer - now firmly established as
standard practice in the major trading nations. Your
customer will instruct his bank to make payment to
any bank account specified by you. It is good
practice, therefore, to include account details on
your invoice.

• Buyer's Cheque - an unsatisfactory method of

settlement. It carries the risk of dishonour upon
presentation as well as the added inconvenience of
being slow to clear. You should only use this method
if you have an established trading history with your
customer or where you have increased your profit
margin to offset cash-flow problems caused by
delays in receiving payment.
• Banker's Draft - arranged by your customer who
instructs his bank to raise a draft on its
corresponding UK bank. It provides additional
security to a Buyer's Cheque but can be costly to
arrange and runs the risk of loss in transit.

• International Money Orders - these are similar to

postal orders and are pre-printed. They are therefore
cheaper to obtain than a Banker's Draft but, again,
run the risk of loss in transit.

Insurance

Export Credit Insurance

It is good practice to insure your export orders against non-

payment, even if your customer is a well-known or reputable
company in a low-risk country. Your chosen insurance company will
cover the payment risks involved in international trade and provide
you with an important safety net.
See SITPRO's separate briefing on Managing the Risks of
International Trade.

Cargo Insurance

Cargo Insurance covers loss or physical damage to goods whilst in

transit. The Incoterm specified in your contract of sale will
determine who is responsible for arranging this cover. Only under
CIF and CIP will you be obliged to arrange cover, in which case you
should build this cost into the selling price.

One of the main benefits of arranging insurance for your customer is

the control you have over the process should a claim arise. If you
are not responsible for Cargo Insurance you have the option of
Cargo Insurance Contingency Cover for cases where cargo arrives
damaged and the importer refuses to accept it. Insurance
companies generally provide Cargo Insurance through the freight
forwarder, or other trade intermediaries.