Lamarwaltersuccess Blog

April 20, 2011

“How To Source, Produce And Finance An Overseas Export”

Filed under: Business, Inspirational, Motivational, Sucessful, Uncategorized — lamarwalter @ 9:54 pm

By: Laurel Delaney

Got a customer overseas who has asked you to export 25,000 umbrellas? Fantastic—here’s how.

Let’s say Customer A is located in Finland and wants you to find a manufacturer of high-end umbrellas from the United States. You do your homework and come up with four reputable suppliers, who you ask for proposals including: 25,000 umbrellas with a superior design, competitive price, high quality, timely production schedule and reasonable transportation fee to your factory door. You narrow it down to two and propose both, indicating the unique benefits each brings to the table.

You might want to get two separate quotes on transporting the goods from your supplier: one from the U.S.A. umbrella factory door to your factory door and the other from the U.S.A. umbrella factory door direct to your customer’s door in Finland. (The latter will probably be the lower price because you reduce transit miles.) Remember, when it comes to shipping anything overseas, consult with the best transportation company available to make the right transport decisions for you and your customer.

Your customer decides on Umbrella X, which comes to a total of $14,500.00 for 25,000 units. You add in shipping and insurance costs and the total now comes to $17,000.00. To make a profit you need to factor in a markup or profit of anywhere from 10-20% on the actual cost of the product. After checking on the market for umbrellas in Finland, you find people need and want them but they aren’t widely available. With that in mind, you go with a high-end markup: 20% profit. Now we’re looking at $17,000.00 + $2,900.00 (20% of $14,500.00) = $19,900.00.

Next, figure out how to finance the deal. Contact your own bank to show you thought of every imaginable way to finance an export sale. You can also refer to my previous article, “8 Ways to Cut Costs On Export Sales,”—see point No. 6. Ask your banker: Can I finance an order for 25,000 umbrellas valued at $19,900.00 with a transferable letter of credit or an assignment of proceeds on a letter of credit? If so, how does it work and will you guide me in working with my customer to ensure that my supplier in the U.S.A. and I get paid?

Here is an explanation of the difference between a transferable letter of credit and an assignment of proceeds:

1. Transferable letters of credit.

You are permitted to transfer your rights in part or in full to another party. In our case, it would be transferring a specified dollar amount sans your profit to your supplier in the United States. Transferable letters of credit are typically used when the original beneficiary (you) acts as a middleman between the supplier of the merchandise and the buyer. The supplier is thus assured of payment for the goods even though he is not dealing directly with your overseas customer. Keep in mind that no credit line is needed here, since you are using your L/C as collateral. Once you transfer an L/C, there will be a nominal transaction fee involved.

2. Assignment of proceeds.

This method is very similar to a transferable L/C. The difference is that whether or not a letter of credit is issued in transferable form, you may request the paying bank to pay to a third party the proceeds guaranteed under the letter of credit. No credit line is needed in this transaction, but you will be charged a nominal transaction fee. The assignment of proceeds has no monetary value to the third-party assignee until the proceeds (the actual payment by the bank) become available. If you neglect to ship merchandise as ordered, or fail to submit proper documentation, no payment will be made to the assignee even if they can present the letter of assignment.

I find L/C assignments very advantageous. For my first seven years in operation as an independent exporter, I conducted business only against irrevocable letters of credit confirmed with a U.S. bank. The customer opened the L/C in favor of my company. Once the documents were prepared and approved by the bank, we were paid. We then paid our supplier. For an export sales transaction of $25,000 or less, the supplier would usually be agreeable to granting me an open account status, provided they could at least review a copy of the L/C and verify that it was legitimate.

When preparing a copy of an L/C to show a supplier, we would block out our customer’s name and address to protect their confidential status and our own sales interest. For a larger deal—say, $45,000 or more—the supplier would require a more secure payment method. That’s when we discovered an assignment of proceeds against a letter of credit.

The customer doesn’t have to know you are making the assignment against his L/C, and the supplier never finds out who the customer is. All you have to do is go to your bank with the L/C that has been opened in your favor, request an assignment form and fill it out. You indicate on the form exactly what portion of the L/C you want assigned to your supplier (again, in our case above, we’d leave out the profit). You can state this portion either as a dollar amount or as a percentage. There’s a small fee involved, but it’s worth it. Your supplier now has payment guaranteed from you, provided she does her part by supplying the product.

Have we convinced you how easy it is to source, produce and get paid on special export sales? If so, get going with your customer’s big idea!

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