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As you turn on the TV today, a news reporter was interviewing a guy who can’t find any ‘plus size’ shirt in a retail store. Poor guy. He got rejected in almost every retail clothing store he went. He’s obese but he cannot find any shirts that fit him after shopping for 3 months! Imagine you are the ‘hero importer’ (ya, I made up this word!) who is determined to go out and source for the right clothing for fat guys like him.
You eventually found something in China, and you decide to import those ‘plus size’ clothing from China to US. However, is it really that simple? Dead no! So, you may ask ‘what are the disadvantages of importing?’
Whenever you represent another business or individuals to sell or buy, you can be at risk. Doing business with customers from a different country, added with the uncertainty of language and currency differences, can pose extra business complications and risks. Hereby are the 5 common risks that you need to watch out for when you are the importer.
1) Financial Risk
A price you agree with a customer or supplier on one day could rise or fall if the exchange rate changes. By doing nothing, you are gambling your way, which can lead you to losses. This is especially true in the current economic climate where currency is fluctuating daily making it more difficult to keep track of exchange rates. These situations can possibly arise:
- if you’re importing those ‘plus size’ clothing priced in Chinese Yuan that forms part of goods you’re selling in US dollars, you’ll need to decide how to price those goods to reflect the exchange rate.
- The exchange rate changes before delivery after both parties agreed on the price of the imported clothing.
To mitigate import-export financial risk, you can do any of the followings:
- Take up a forward foreign exchange contract – work with a bank or financial organization to fix the exchange rate of the contract. For instance, you will need 100,000 yuan for your clothing order in 12-month time. 1 yuan might currently be worth 15 US cent, and this supply would theoretically cost USD$15,000. What if the Chinese yuan increases in value against the US dollar to 1 yuan against 20 US cent? This supply may then cost you USD20,000. With a forward foreign exchange contract in place, you can buy 100,000 yuan for USD$18,000 on a specified date. If your judgement is wrong, you may lose out though. Ultimately, this contract can give you greater peace of mind since you can budget for future uncertainty.
- Use currency options – similar to the forward foreign exchange contract, many banks offer this alternative. But, currency options come with a premium price for maximum flexibility. The exact amount will depend on the amount of currency involved, the exchange rate, the length of the option and may typically be in the region of 1 or 2 per cent of the face value of the importing contract.
- Open a foreign currency account – this option is suitable for frequent dealings in a particular currency and allows you as an importer to have greater control in the hedging bets. You can keep your commission or profit earned in the account and move the money when the exchange rate favors your market position.
- Always play safe and consult your accountant or allies on these questions:
- What is the most suitable hedging method to manage my cash flow?
- How can I protect my working capital position?
- How can I source other goods/services (where labour cost is lower) to hedge my risk?
2) Political Risk
As an importer, you may face embargoes, sanctions or quotas on imported goods. In the United States, the decade from the mid-1980s to the mid-1990s saw import quotas placed on textiles, agricultural products, automobiles, sugar, beef, bananas, and even under-wear—among other things. In a single session of Congress in 1985, more than three hundred protectionist bills were introduced as U.S. industries began voicing concern over foreign competition. The best way to avoid such risk is to plan ahead by discussing your situation with your nearest Chamber of Commerce or get help from a SCORE member in this small business community.
3) Operational Risk
Managing international deliveries and payments can be a complex affair. What if your importing orders took longer to deliver? What if you have to incur costs such as raw materials when the customer receives the goods and delayed payment for them? What if your orders arrive late or damaged?
To reduce your operational risk, you can:
- Communicate upfront to potential buyers that you need payment in advance because you are not a charity fund, but you are in business.
- Under promise a delivery date and over deliver to delight your customers – this gives you leeway if anything goes wrong.
- Get trade references or work with a factory audit firm to verify your suppliers – best if you can visit and inspect the factory yourself at least 3 times a year (traveling for fun and profit, why not?)
- Work with reputable couriers who have offices and depots in your trading market, so that you can track the consignment more effectively.
- Negotiate for an insurance policy that provides a flat rate charge on consignments rather than an annual premium to cover non-paying customers, product defects, and potential losses or damages in land, sea and goods.
4) Regulatory Risk
You never know that your good intention to help those fat guys may be hindered by legal compliance of US standards, and you may require product testing and certification. You may not know that those clothing brands are subjected to abuse of trademarks or copyright. The best way to avoid such risk is to plan ahead by discussing your situation with your nearest Chamber of Commerce or get help from a SCORE member or lawyer in this small business community. It’s advisable to source a local lawyer before you enter the final negotiation stage, so that you can have more bargaining power in your contract agreement. This is crucial as you save time by avoiding the hassle of looking for a lawyer at the very last minute.
5) Cultural Risk
Dealing with a different language and business culture can increase the risk of confusion and potential negotiation problems. For example, you may experience difficulty explaining the technicalities of your clothing requirement over the phone with the Chinese suppliers. To reduce your cultural risk, you can research with our recommended ‘101 Essential Global Trading Resources’ by:
- learning how to accept business card, the culture and etiquette of doing business in China with Kwintessential guide
- illustrating technical details with charts on collaborative platforms like Google Docs or Creately
- learning the basics of foreign language in Livemocha
- befriend a translator or interpreter who cares about you and your business
Final Tips to Avoid Importing Risk
In summary, these disadvantages can be minimized when you:
- Protect yourself against foreign currency and exchange rate fluctuations
- Always surround yourself with the B.A.S.I.C.S team members:
- B-anker
- A-ttorney (or solicitor),
- S – self employed (you)
- I-nsurance broker
- C-hartered accountant or C-PA
- S – sourcing agent
- Seek professional advice on how to import from China from ethical import export agents
- Understand that the import-export business is all about giving trust and protecting your reputation and integrity in all dealings
Do you have better ways to deal with the above importing risks? What’s your success stories in avoiding those risks when currency market is moving against your way?
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{ 3 comments… read them below or add one }
yes…the fact is that you are actually self-employed even though you are an employee!
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nice post thanks for sharing……Many people around the country enjoy being able to work from home. There are a number of benefits and advantages that accompany individuals who are able to work from the comfort of their own home, working their own hours and doing what they personally want to do. Some people are not as responsible as they need to be when it comes to sitting down and forcing themselves to work, and some people are the opposite and find themselves obsessively working around the clock. There are benefits and drawbacks to almost any action that a person does. However, many people are not aware that when it comes to taxes, there are some distinct disadvantages to working from home and acting as one’s own employer.
nice post thanks for sharing……Many people around the country enjoy being able to work from home. There are a number of benefits and advantages that accompany individuals who are able to work from the comfort of their own home, working their own hours and doing what they personally want to do. Some people are not as responsible as they need to be when it comes to sitting down and forcing themselves to work, and some people are the opposite and find themselves obsessively working around the clock. There are benefits and drawbacks to almost any action that a person does. However, many people are not aware that when it comes to taxes, there are some distinct disadvantages to working from home and acting as one’s own employer.