6 Financial Mistakes Exporters Make And How To Avoid Them

6 Financial Mistakes Exporters Make And How To Avoid Them | Image Source: Pixabay

The commodity trading business is both high-risk and richly rewarding as long as you follow a set of principles that would set you and your business up for success. But despite best practices to closing safe and secure transactions being widely publicised, many exporters consistently stray off the safe route and end up losing a bulk of their investments out of desperacy or whatever reasons.

If you’re a new or existing exporter and want to ensure you don’t lose your funds under any circumstance, here are 6 ways to avoid the financial mistakes that most exporters make:

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1). Shipping Commodities Without Any Guarantee Of Payment:

A guarantee of payment in the form of an irrevocable letter of credit is the most secure way to ensure you’re not just going to get paid, but would also provide comfort and peace of mind to the importer.

When international buyers issue a Letter of Credit, they are literally blocking the funds in their bank accounts for a certain period of time to be released to you after you meet a certain set of conditions, which could be submitting a certain set of required documents, meeting certain criteria, and much more.

Despite the benefits of this, most exporters still take the risk of shipping commodities to international buyers without any guarantee of payment except a worthless contract they would find extremely difficult to enforce.

Unless the organisation procuring is a top organisation well known for its size and consistent payment history to suppliers, don’t risk supplying anything without a Letter of Credit.

It’s also key to note that you should not blindly accept a Letter of Credit from an international buyer. Always negotiate the LC terms, run the verbiage of the Letter of Credit by your bank, and ensure there are absolutely no loose ends, as when exporters fail to properly negotiate reasonable & achievable LC terms, the international buyer could still walk away from paying them a dime.

See Also: How Exporters Can Secure Payment For Goods Shipped To International Buyers

 

2). Procuring Goods From Locals Without Using A Worldclass Inspection Company:

Most exporters procure commodities from locals with the help of independent inspectors. A lot of the time, they procure these commodities after inspecting it themselves, and few times, they procure the commodities with the belief that the seller has put in the right goods.

When commodities are procured this way, the exporter is taking on the risk of purchasing goods that may very likely fail to meet the required specifications after re-inspection is done at the port by top renowned inspection companies like SGS, Cotecna, or Bureau Veritas as likely agreed with the buyer.

8 out of 10 times, the goods fail to meet the agreed specifications.

To avoid this problem, it’s best to contract the agreed inspection company to be responsible for carrying out the product inspection at the point of purchase before re-inspection at the port. This way, you can ensure the goods purchased will the same quality as what is delivered.

While many exporters shy away from this because of supposed high costs of inspections, the inspection cost that would have been spent is usually less than 1% of the total cost of the goods purchased for supply to the port. Meaning they risk 99% of their whole investment over a 1% cost that would have guaranteed the quality.

See Also: How To Ensure The Quality Of Goods You’re Buying Locally, Exporting, Or Importing Meets International Standards

 

3). Not Carrying Out Due Diligence On The Buyer:

Most exporters never carry out due diligence on any buyer looking to purchase from them. They get excited at the idea of making a delivery and rush to sign a sales & purchasing agreement without knowing whether the company asking either has the capacity to pay, has a great track record of dealing right with the other exporters, or is blacklisted somewhere as a dubious company.

While the idea of receiving a Letter of Credit from an importer could be exciting, it’s important to gather as much information as you can about the company before you choose to commit to them. In summary, you should carefully pick your clients as you would with your friends.

By carrying out proper due diligence on the buying company, you can know if they’re what and who they say they are and if they would truly act in the best interest of both you and them, and not just them alone.

Ignoring this key factor is one of the fastest ways to lose your investments, especially if the importer’s values and belief systems are not morally inclined.

See Also: How To Carry Out A Due Diligence Exercise On A Commodity Trading Business

 

4). Not Doing Insurance:

Buying an insurance plan guarantees that you’d get your money back in the event that something beyond your control happens to the goods. But sadly, very few exporters choose to do this.

A lot of exporters avoid paying insurance because they’re looking to make a little more profit on their investments, and so, would take on the high risks of procuring and transporting goods all the way from the source of purchase to the port of delivery without any form of insurance.

Getting a Letter of Credit is not good enough to guarantee the safety of your transaction. You must get insurance too!

Comprehensive Insurance usually costs anywhere from 0.1% to 1% of the total cargo value, and when the idea of an exporter refusing to pay this comes to mind, it’s difficult to feel bad for them when they lose their investments to theft, war, pandemics, pest & diseases, currency fluctuations, and so much more.

To be safe, you could do both a comprehensive CLAUSE A Marine Insurance and also purchase an Export Credit Insurance plan. This way, you’d be guaranteed in the event that something happens to the goods or if the buyer or their bank refuses to pay for any reason at all.

See Also: How To Use Export Credit Insurance To Protect Your Export Transactions And Ensure You Get Paid No Matter What

 

5). Not Properly Negotiating The Contract:

Most exporters simply accept and sign the contracts sent to them by the international buyer without doing a proper review or providing mutually beneficial amendments for the fear of losing the buyer.

For the record, you have no business having any business dealings with any international buyer that is not willing to mutually negotiate and accept terms that work great for both parties. If they insist on their one-sided contracts, walk away.

To be prepared, you should always have a contract you work with sent over to the buyer. This contract should be 100% mutually beneficial and must cover all concerns and worries that you or any international buyer may have for any transaction. To achieve this, work with a lawyer to draft a great contract, and have it on standby anytime a buyer comes along.

If the buyer insists on first issuing a contract, negotiate the terms well, run it by your lawyer, and ensure there are no loose ends.

 

6). Undergoing No Form Of Export Training:

There are exporters who succeed without any form of training but by purely learning from their trials & errors. But a very few have successful transactions based purely on luck.

While trials and errors can be a way to learn the ropes, very few make it far because when they fail once or twice, they’ve very likely lost all their investments and are already in debt to their creditors. As for those who still succeed, they’re usually less than 10% of the pack because they still have more money to try other transactions.

If you plan to venture into the export business, it’s crucial that the first thing you do is to learn everything you can about international trade because around 90% of exporters lose their investments on their first trial, and losing all you have all at once could be the end of your finances in the short-term.

In an industry where you could make so much money or lose everything at once, you must never act on just assumption. Hope is not a strategy!

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What are your thoughts on these 6 ways to avoid the financial mistakes most exporters make? Let me know by leaving a comment below.

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