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Trade Basics For Exporters - Contract
A good contract is key to successful exporting. It not only provides guarantees to your suppliers, it protects you. Below you will find important information on contracts - to help ensure that your exporting experience is rewarding:
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Managing Trade Risk: Risks you may encounter that are even wider in scope than domestic commerce |
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Trade Finance Solutions: Payment instruments that can offer you a higher degree of security |
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Elements of a Sales Contract: How to avoid disputes and problems later on |
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Pre-shipment Financing: Pre-shipping options that can help lessen the demands on your cash flow |
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Credit Insurance: Covering your losses if a foreign buyer fails to pay |
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Bidding on Overseas Contracts: Tips on effective bidding |
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Managing Trade Risk
Commercial practices and financial systems differ widely between countries. When you make a sale, pricing is often expressed in foreign currencies, and additional costs such as transport and insurance can have a big impact on your profit margin. Overall, the risk issues associated with overseas trading are wider in scope than in domestic commerce. The list below summarizes some of the risks that you will need to consider.
- Price Risk - Can your costs, including financing costs, be covered in the selling price?
- Currency Risk - Can fluctuations in exchange rates be accounted for? Can the foreign buyer pay in the currency of the contract?
- Buyer's Financial Risk - Is the buyer well established and financially stable? Will this be a single transaction or is this a company that you would like to do business with over the long term?
- Buyer's Payment Risk - Can risk of non-payment be estimated and mitigated? Could the buyer sustain large fluctuations in currency exchange rates or government imposed exchange controls?
- Foreign Bank's Risk - How do Canadian banks assess the risk of doing business with the financial institution that your buyer uses?
- Political Risk - What are the political risks of doing business in a particular country, and how can they be protected against?
Trade Finance Solutions
Why are trade finance services so important to successful importing and exporting? When buyers and sellers do not have an established trading relationship, payment instruments such as letters of credit and foreign collections can offer both parties a degree of security from commercial risk, and are governed by the conventions of international trade. Financial institutions like the RBC Royal Bank can act as effective and convenient intermediaries in your international transaction by:
- Simplifying payments using our international correspondent banking network
- Allowing exporters to maintain constructive control over goods by having the bank hold documents of title, or by consigning goods
- Giving our financial backing to your transactions using letters of credit
- Helping prevent misunderstandings by employing the International Chamber of Commerce's international codes of practice
Put simply, trade finance services limit your exposure to risk in foreign markets. For instance, letters of credit are very commonly used in emerging markets, for they transfer the buyer's payment risk to the bank. A documentary collection is another form of compromise, whereby the exporter can use the banking system as an agent to collect payment. At first glance, these transactions may seem complex, so we have laid out the process in a simple, step-by-step format.
Elements of a Sales Contract
If you have a contract for a small deal, you may simply ship the goods by courier, using credit card payments or wire transfers. But what if you need to arrange multi-modal freight? A bid guarantee? A foreign exchange option? Whether you are doing business in the U.S. or overseas, you will need to consider your shipping and payment arrangements carefully. For a larger sale, a well thought out sales contract can help you avoid disputes and reduce your risk exposure later on.
At minimum, the contract should include:
- A description of the goods, including the exact quantity
- The unit price and total amount payable
- The terms of delivery and other specifications of packaging
- The time allowed for shipment and presentation of documents
- The currency and method of payment
- Clarification of who will arrange insurance for the shipment
Pre-shipment Financing
Don't let your international trade business falter because of a shortage of working capital. Production and delivery time can put high demands on your cash flow, but these pre-shipment financing options can help.
- Advance Payment - The easiest way to finance your export production is to take advance payment. Requiring buyers to pay in advance will improve your cash flow, but you may lose sales if your trading partner does not have confidence in your ability to deliver the goods as ordered.
- Letter of Credit (L/C) - This instrument is very commonly used outside of North America. If you have negotiated terms with your buyer to allow a period (e.g. 60 or 90 days) before payment, a letter of credit can be discounted by the bank. For example, if an L/C is due in 30 days, RBC Royal Bank can make the payment today (assuming the foreign bank's risk is acceptable), less a discount fee from the amount you would get if you waited the full term.
Credit Insurance
Even if you are confident that your buyer is of good reputation and financial standing, you may want the added protection of insurance. Export credit insurance will cover your loss if a foreign buyer fails to pay. Credit insurance may also make it easier to offer credit terms to your buyer, and can improve working capital by providing your bank with the needed assurance to extend your operating line.
Credit insurance is available from a variety of sources. The Export Development Corporation (EDC) is a Canadian Crown Corporation that operates a variety of programs to provide businesses with the protection they need against international trade risk. EDC serves companies of any size, and has a specialized group to address the particular needs of smaller exporters.
For information on insuring your goods while in transit, see our shipment guidelines below.
Bidding on Overseas Contracts
In many industries, companies that bid on contracts are required to establish their financial integrity by means of bank guarantees - particularly for international projects. To ensure that suppliers only submit serious offers, international public tenders often call for cash deposits or irrevocable guarantees for 2% to 10% of the contract amount. If your bid is successful, the bid bond will likely be the first of several guarantees you will be asked to provide.
An RBC Global Services' International Trade Specialist is available to help - and to offer you advice on the trade solutions that are right for you.
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