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Importing requires a significant upfront investment - something that can leave smaller businesses struggling to cover their costs.
Negotiating favorable international payment terms can help business owners overcome potential cash flow issues. However, importers need to consider their partners' needs as well as their own when negotiating terms, says Kenneth Weiss, owner of Plans and Solutions, an international trade consultant in Gaithersburg, Md., and author of Building an Import/Export Business.
"It's important to remember that both parties need to make money," Weiss says. "Not thinking about the interests of the exporter, as well as your own, is a mistake in the long run."
— Kenneth Weiss, owner of Plans and Solutions and author of Building an Import/Export Business
When entering into negotiations, consider these common compromises and tools that importers use to give exporters the confidence that they will be paid.
It may seem difficult to establish international payment timing that will serve both parties equally well. However, importers and exporters can combine several payment-timing tactics to ensure they reach a deal that both parties are comfortable with.
Consider using one or a combination of the following approaches to payment timing:
· Favorable international payment terms might involve the importer agreeing to pay for part of the order up front and part upon receiving the imported goods. This way, both parties are invested in the deal and neither party takes on all of the financial risk, Weiss says. A 50/50 split is a good goal, but it depends on the two parties involved.
· The import business may also choose to borrow money from an international bank using the merchandise as collateral for the loan. This way, the loan can cover costs during the time between the purchase and sale of the imported goods, he says.
· The exporter might agree to work under an open account through which the import business pays in full a net 30 or 60 days after receipt of the merchandise, or on consignment based on when the goods are sold. "This gives the importer more time to sell the product before paying the exporter," says Larry Delson, owner of Delson International, an import/export consulting firm in New York. This type of arrangement delays international payments to exporters, but they may still agree to it if they have a good relationship with their import partners or in exchange for more profitable terms.
· For large shipments, an import business may secure a letter of credit, which is a document from a reputable international bank. A letter of credit guarantees the exporter will be paid in full by a certain date as long as the imported goods meet all the agreed upon standards and quality requirements. This reduces the international payment risk to the seller, which makes it easier for the buyer to negotiate more favorable terms, Delson says. "It gives the seller a greater degree of confidence in the deal," he says. "Under a letter of credit, the seller is assured of payment, provided it has complied with the terms of the letter of credit, because the bank is substituting its credit worthiness for that of the buyer."
· Letters of credit can help importers and exporters feel secure while building their trust in one another's businesses. However, as the two businesses grow to trust one another, the business owners may want to consider using a trusted online foreign exchange service to submit and receive international payments, and provide currency conversion rate information. An online foreign exchange provider may be able to offer email market-rate alerts to keep business owners up to date on the current currency conversion rates. Plus, online foreign exchange providers may also be able to offer bids that enable business owners to specify their desired foreign exchange rates. If the preferred rates become available, the transactions are automatically executed.
Any of these terms can help an import business better manage its cash flow, but it can take time for sellers to establish the trust necessary to agree to such terms, Delson says. "Such negotiations are not common for a first transaction," he says. "But once you have a relationship, they will be easier to obtain."
Example: 1USD = xx INR
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