Importers - 10 major causes of sleepless nights (with some suggestions to help)

With an ever increasing number of companies in the UK sourcing their component parts or finished goods from  every corner of the globe, it is unsurprising that there are a whole host of issues/worries/concerns relating to those purchases which may interfere with a good night's sleep for staff/management/directors who are responsible for the procurement. This blog collates the 10 most common concerns which have been voiced during import finance themed workshops run either as a public course or in-house for specific companies in 2013.  1. "The quality of the goods - our biggest worry". UK importers who are sourcing finished goods often from Asia will almost always have quality apprehensions uppermost in their minds, and will generally quote these concerns as their chief  worry. Importers will attempt to allay these fears with a variety of measures and in some instances they will appoint independent inspection agencies to examine the manufactured goods to check that they are as per required specifications. If the UK buyer has arranged for their bank to issue a Letter of Credit in favour of the overseas supplier and the terms require the beneficiary to submit a clean report of findings relating to the finished goods, this provides additional comfort for the UK buyer, as without the report, the supplier is unable to present a full set of documents under the Letter of Credit. However, the goods are routinely checked in the manufacturer's factory and rarely when they have been loaded into a container for shipment, so an unscrupulous seller could switch the goods for substandard products. Many UK importers will appoint local agents to oversee production and if the importer's customers in the UK are major retailers, who will impose very exacting standards then rigorous quality checking during and after manufacture will be required. 2. "Cash flow - having to pay suppliers with order/on shipment" As liquidity issues continue to be an important factor in the major manufacturing powerhouses in the world, and with relatively high interest rates charged by banks in those territories to finance the production of finished goods, the demand for cash to be paid by UK importers as early as possible has increased in recent years. It is fair to say that the demand for Letters of Credit issued by UK banks in favour of particularly Asian suppliers has decreased, often replaced by the dictate of 30% payment of the purchase price with order (enabling the purchase of the raw materials and help with initial labour costs) and payment of 70% of the purchase price on proof of shipment of the goods. These are very common terms of payment, but the risks for the UK importer are clear, in that they will have fully paid for the goods when the supplier sends a copy of the transport document, generally a copy of the Bill of Lading or Air Waybill. They will not have personally inspected the goods, and if the goods are being transported via a vessel from the Far East to the UK, they will have to wait a further 28 - 30 days before they are able to clear the goods. Cash flow is impaired if the 30% payment with order is paid 30 - 60 days prior to shipment, and the balance paid on shipment, with as stated goods taking around 30 days to reach the UK, then perhaps the goods are held in stock for an average of a  further 60 days and finally once sold the debtor takes 60 days to pay for the goods. The period of being "out of funds" can be very substantial. 3. Foreign Exchange Risk Management Foreign exchange risk is seen by many financial controllers/directors as a major risk to their business, and some the more senior of these will remember the USD/GBP rate at almost parity in 1985 and the more recent 2 Dollars (and above) to the Pound, of just a few years ago. An unexpected major shift in the rates can wipe out the profit on a deal for many small to medium companies especially if margins are thin on the transaction. Banks will offer a number of simple devices which will allow customers to effectively manage their foreign exchange exposure, but the most popular, the basic forward contract, will require the customer to agree a facility with their bank, which will have to be backed up with some security/collateral. More complex hedging structures are more heavily regulated than ever, especially since the well publicised interest rate protection issues hit the headlines recently, with small companies complaining that they had not understood the consequences for them if rates moved effectively against them and they had to reimburse the financier. It would appear that most companies will consider protecting a portion of their exposure, perhaps up to 50%, leaving the remaining 50% unprotected (speculating that the rates will move in their favour). There is no definitive right or wrong to foreign exchange risk management, but whatever strategy a company decides to follow, it is essential that it is regularly reviewed and assessed. 4. Stock - worries about unsold stock All UK importers of finished goods will seek to turn the purchased stock into cash as quickly as possible, helping to reduce any finance costs involved in purchasing/stocking/selling the goods and to realise a healthy profit. A bank or financier will want to understand, on average how many days it takes for stock to turn into a sale, and they will check that these quoted averages match to those stated in the company balance sheet. Banks will unsurprisingly be resistant to providing finance for, in often quoted terms "a warehouse full of unsold stock", so confirmed orders for purchases are an important factor if an importer is seeking finance from a provider. Some UK importers have worries about their goods becoming obsolete and unsaleable when they are in stock, especially if the products are subject to fashion etc. In essence unsold stock is always a cause for concern amongst UK importers. 5. Late deliveries/delays - missing important deadlines/events. Christmas sales are a vital element to many retailer's profitability, and Christmas stock is usually on the shelves by the third week in October at the latest, often to coincide with the school's   Autumn half term breaks. This will require the finished goods being received into a UK importer's warehouse in good time to ensure these deadlines are achieved, but delays and late deliveries are a constant concern and cause of anxiety. Some importers will arrange to issue Letters of Credits in favour of their overseas suppliers and use the latest date of shipment and expiry dates to effectively manage the issues regarding delivery date requirements. Whilst not being a perfect solution, as events in the manufacturer's supply chain may still cause these dates to be missed and a request from the supplier for an amendment to the Letter of Credit terms, may be received. However it does provide a defined structure to the shipment, and the supplier is aware that if they present discrepant documents, showing late shipment, the buyer's bank, (the issuing bank) is not obligated to pay. 6. Identifying new suppliers. The UK government has a particular focus on encouraging exports and provides some assistance in matching sellers with potentially suitable buyers in overseas markets through UK Trade & Investment initiatives. It is no surprise that there is not a similar enthusiasm or initiative to help importers, so they need to more resourceful and it must be said, careful when seeking new suppliers. Identifying new trading partners is fraught with potential pitfalls, with fraud being uppermost in most company's minds. The worry about prepaying and not receiving the ordered goods is a major concern. Most delegates use trade shows/fairs as a popular, relatively informal environment to evaluate new suppliers. 7. Damage to goods in transit/goods lost in transit. A natural worry for importers with goods travelling thousands of miles, usually of course in a container. The packing of certain goods is extremely important, especially with LCL loads and thankfully the instances of damage to goods in transit is not especially high. The issue of who is responsible for damage or loss is determined by the Incoterms ® rules which have been incorporated in the contractual sale agreement. Suffice to say that there is a high degree of confusion regarding the use and interpretation of the rules amongst importers and exporters, and some education would really help to demystify this important area.    8. Fraud. Fraud is a worry, particularly for smaller importers, who may not have a nominated local agent in the supplier's country to help oversee and police production. The importer may have visited the supplier and carried out some due diligence checks etc. but if there is no or little track record/trading history between the parties to date, there will always be a thought in the importer's mind that fraud is a possibility. This may occur, if the UK importer has arranged with their bank to issue a Letter of Credit in favour of the supplier, and the supplier presents fake documents. Banks will take care to ensure that the documents presented under a Letter of Credit are genuine, but article 34 in UCP 600, headed up as Disclaimer on Effectiveness of Documents is clear that the bank  "assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document....". Thankfully fraud is not especially common, with most suppliers wanting to build up lasting relationships with buyers in the UK.           9. Chinese New Year effect. The Chinese New Year effect is mentioned in almost every instance, by UK importers who regularly purchase goods from China, as a potentially serious risk to their business. An increasing trend had developed where migrant workers return to their home towns or cities for the new year celebrations, and then decide not to return to their most recent place of work, but to seek alternative employment. Traditionally the holiday period lasts for 2 weeks, but the effect on manufacturing seems to last up to 4 weeks, with in excess of 2 billion passenger journeys causing virtual human gridlock in some areas. It would appear that the overall impact on manufacturing has probably increased in recent years, and UK importers have to attempt to cope with the resulting fall out.     10. Political/Economic Risks. It is a real challenge for importers (or exporters) to evaluate the political/economic risks associated with trading globally, other than assessing the risks of dealing in the most obviously politically unstable territories. Economic issues can spring up quite suddenly, with Cyprus as a typical example earlier this year. It is helpful having local agents to provide feedback on exactly what is going on in a  particular region, but ultimately the UK buyer makes a decision on whether to trade and the risk of  sudden civil unrest or an unexpected economic issue arising is always a possibility.        These 10 worries/concerns are not intended to be a definitive list, but they do represent issues which importerss have raised on a regular basis at workshops/seminars in 2013.