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Which Letter of Credit Should You Use?

Letters of credit are a hugely important part of international trade and import export.  They guarantee payment and allow the seller to receive payment which can be advantageous when capital is needed up front.  Our quick guide below shows you the four most common types of letter of credit and when to use them.

IRREVOCABLE:  Cannot be changed or amended without the consent of both the  buyer and seller.

RED CLAUSED:   Useful when the seller needs an up front funds from the letter of credit, this could be to buy the raw material for the contract. The amount available was usually printed in red ink hence the name.

TRANSFERABLE:  Used by the seller  to purchase the goods of the contract from a third party. It enables the seller  the purchase  the goods   with  the funds from the Letter of Credit. Very useful when the seller is acting as a middle man and has not the personal funds to purchase the goods of the contract

CONFIRMED:  Used when the seller is unsure of the buyers banks ability to honour the Letter of credit. This could be due to Political or financial unrest in the buyers country. The letter of credit is Confirmed by a second bank usually the sellers bank, The confirming bank becomes the prime payer and seeks reimbursement from the buyers bank.

Trade Finance: The new funder on the block for importers and exporters

The construction sector is experiencing the fastest rate of hiring for over 15 years, the pound is stronger than it was 2 years ago across 18 major currencies, and countries are beginning to partner on deals which encourage trade globally.

To accommodate this, business funding has become a hot-topic amongst the SME and corporate community, with the rise of alternative debt and equity funders (e.g. the crowdfunding platform Crowdcube and invoice discounting companies such as MarketInvoice).

Yet 70% of businesses are struggling with getting funding, particularly for purchasing goods and services from overseas, which is surprising given the current position of the UK economy.

Sadly, many companies don’t know where to begin when it comes to funding their business, but what doesn’t help, is that business funding is complicated. Depending on the stage of your business, how much capital you already have, how quickly you need the funding and how long you’ll need it for, the funding you require could vary immensely.

Trade finance, an umbrella term for the ‘financing of international trade’, covers a range of financial products which can help importers and exporters trade. International import and export businesses have the added complications of understanding the mechanisms of trade finance, which involves jurisdiction across different countries, language barriers, understanding shipping protocol and insuring their order.

The most common form of trade finance is a Letter of Credit or Bill of Lading, which are both mechanisms to securitise the assets which are being transported or shipped; in other words, the goods or services are the security to which a funder will lend.

For companies looking to import or export, we’ve put together some tips for ensuring success:

1. Do your due diligence

Most business owners in the space will be aware of their competitors in their market, and the competitors of their suppliers. It’s not hard to pull import or export data from government website or through calling local experts on the field. It’s also worth sense checking your suppliers and customers – are they creditworthy and reliable, do they have trusted reviews?

2. Learn about importing and exporting

Aside from a Letter of Credit Trade Finance deal, it’s vital to understand the mechanisms of transporting and shipping – from freight forwarding, to Bills of Lading. It may be a good idea to go on an education course such as ABTS Training.

3. Talk to a broker

Brokers can offer recommendations or suggestions for a business which could save them time and money. Also, because of their established relationships with many funders, they may be able to negotiate a better deal or rate and find the option which is most suitable for your business.

4. Know your risks

Business owners should know from the outset what the risks and challenges are before undertaking a trade finance deal. Mitigating or reducing these risks through insurance, credit checks, independent analysis and understanding the market that they’re operating versus opportunity and financial benefit of a deal can help determine the go-no-go decision.

5. Don’t underestimate the power of negotiation

Whether it’s your customers, suppliers or financiers, negotiation can often be the make or break for your business. Being able to negotiate terms, prices and rates in a competitive market could give your business a financial advantage.

To conclude, raising funding to help succeed in your import or export business is not easy, but can bring unrivaled success and opportunity for your company. Understanding the fundamentals of the import/export market, mitigating risks and planning carefully though are crucial to protect yourself and the company.

 

Courtesy of our partner Trade Finance Global.  Learn more about trade finance and how it can help your import export business.

How To Export

Businesses must export their products to a global market if they really want to achieve their potential.  With the Internet and relative ease of building your own website, there is no need to focus only on your domestic market. “How to Export” is a common question and the answer involves some study as there is lots to learn, however we have put together the following infographic to get you started.

How To Export

How To Sell Online To A Global Audience

Once you know how to export, the bigger question becomes, how do you sell to an international market?  The Internet is the obvious was to reach a global market without needing millions in advertising budgets through traditional advertising.  Out simple guide below explains the basics of getting your website online and key points to marketing:

ABTS-Web-Design

Starting a Successful Import Export Business

All businesses have a degree of risk. About 50% of new businesses fold within the first year of trading. In other words, only 50% of start up businesses are SUCCESSFUL. What factors contribute to their success? We can start with a raw skill set such as determination, self belief, a desire to succeed together with the desire to determine your own future as well as the will to build your own business. 100% of start up business owners have these attributes so what makes only 50% successful?

As well as these qualities, it’s vital to have the right knowledge of the industry. Offering the right product, having the right product knowledge, having the ability to foresee potential problems and make suitable provisions and have the ability to understand the details of your business as well as understanding finance and cash flow and of course the ability to ‘balance the books’.

You’ll need all the above raw skills plus the specialised knowledge particular to an export import business.

This knowledge is a requirement before you start trading. Learning on the job is fatal, as too many mistakes will put you out of business very quickly. You must have these skills BEFORE you start up your Export Import business or you’ll find yourself as part of the 50% of unsuccessful businesses very quickly.

So what knowledge is needed? Let’s look at just a few of the international trading terms and subjects you will need to understand:

  • Understanding terms of delivery
  • Ability to prepare a contract
  • Ability to understand customs procedures
  • Sourcing worldwide
  • Shipping procedures
  • Market research
  • Methods of payment

Remember, this is just a part of the knowledge you must learn and understand BEFORE you start trading. They are the tip of the iceberg.

ABTS Training will be holding a FREE webinar on Friday 26th June which will address some of the problems associated with starting up your Import Export business. The webinar will also identify and explain some of the points above that you will need to understand to help you kick start your business.

Sign up now and get a kick start to starting your business.