How to Manage Import Finance
Importing from another country can be risky – learn how to negotiate with suppliers and what payment method is best for you
Importing goods from another country typically exposes you to more risk and financial commitment than purchasing from a UK supplier, so it is especially important that you know what you are doing.
In this guide you will learn about:
- Negotiating a deal with a supplier
- What payment methods exist
- The costs involved
- How to arrange short-term finance
What factors do I need to consider when negotiating with my supplier
Both parties will want to obtain different terms but should strive to reach a balanced and mutually beneficial outcome.
The method of payment you choose will, in large part, determine what level of risk you’re exposed too (see below for more on this). You will want to reduce the risk of paying for goods that don’t arrive, or arrive late or damaged and the supplier will want to be paid in full as early as possible.
You should also consider the cost of importing including the cost of delivery, import tariffs, administrative costs and more. Both parties will probably need to arrange financing to bridge the gap whilst the deal goes through. Remember, the party who obtains better financing terms is likely to carry a greater share of the burden.
Most experienced importers should be able to quote you a price in pounds, and whilst you could agree to use a different currency to receive better terms, remember that you will be exposed to a foreign exchange risk.
Inter-EU deals generally require minimal paperwork under free movement of goods rules – unless your annual arrivals exceed £1.2m, in which case you must submit monthly Intrastat Supplementary Declarations (SDs) to HMRC. Imports outside the EU require your supplier to supply extra paperwork including copies of invoices, a transport document and more. You should talk with them to work out what you need them to do.
What terms of delivery do I need to agree with my supplier?
When negotiating with a supplier you need to work out who will bear various cost, risk and responsibility burdens including who will package and label the goods, who will pay for the goods at each stage of delivery, who will insure the goods at each stage of delivery and when you will actually assume ownership of the goods.
When trading internationally, many businesses use Incoterms. These are a set of standard terms for international transactions, drafted by the International Chamber of Commerce (ICC). There are various different sets of terms you can use, depending on the delivery method and kind of transaction you enter into, and each carries a different level of responsibility and risk for buyer.
Four example of these terms are:
- EXW/Ex Works: The buyer arranges to collect goods from the supplier’s premises themselves, placing the maximum obligation on the buyer and the least obligation on the seller, because takes on the delivery risks.
- FCA/Free Carrier: The buyer nominates a third-party carrier for the seller to deliver the goods to.
- DAT/Delivered At Terminal: The seller covers the costs of transport, including insurance and destination port changes, until the goods arrive at customs in the destination country.
- DDP/Delivered Duty Paid: This is essentially the opposite of EXW in that the seller takes on the responsibility for all cost of transport such as import duties and taxes. This places most of the burden on the seller and little on the buyer.
What payment methods can I use when importing?
The most common payment method is an open account when trading within the EU, where risks are relatively low. You will be offered a credit period by the supplier in which to pay for the goods in much the same way as when you trade with a UK supplier.
Another option is bills of exchange where the supplier draws up a bill of exchange with payment terms that you agree to. You can either agree to pay when you are presented with the bill or agree a term bill with payment due after a set number of days.
A letter of credit drastically reduces the risk taken on by the supplier. You apply to the bank and pay a fee – the bank will then issue the letter of credit, which is essentially a promise that the bank will pay them even if you fail to. The most secure version of this is known as a ‘confirmed, irrevocable’ letter of credit.
Paying in advance is generally avoided unless it is for a pilot or extremely low-value shipment, as the importer assumes the greatest risk and has little protection if the goods don’t arrive as described.
How can I arrange finance when importing goods?
As with any large-scale commercial transaction you will generally need finance to bridge the gap at some point.
There are four main options:
- An overdraft facility should be sufficient for a small, controlled shortfall.
- For debts over £100,000 and provided you have an excellent credit rating, you may be able to get your bank to sell you a fixed-term commercial paper at discount.
- For selling imported goods on, you can arrange a short-term finance deal with your bank using the stored goods as security for the debt.
- If you’re being invoiced in another currency, it may be better to arrange finance in the host country’s currency.
Will I have to pay VAT and duty?
You shouldn’t have to pay any extra VAT above the standard rate when you import goods from within the EU, except when importing from one of the ‘special territories’ such as Jersey or Guernsey. Imports brought in from outside the EU are subjected to import VAT of 20% on standard-rated goods before they are released by customs.
You won’t have to pay any duty on goods from EU countries or goods that have been imported to an EU country with all customs charges already paid. Customs duties vary widely for countries outside the EU and may change according to the global economy and that country’s political situation.
How can I make payment for imported goods?
Paying foreign suppliers can be a tricky as you have to navigate the complex process of international currency exchange.
You can use your bank to electronically transfer funds to your supplier, although there might be a high fee hidden in the exchange rate. Alternatives such as Western Union and Transferwise, which offer near-instant transfer at better rates, are becoming increasingly popular.
Another option is to open a bank account in another country. If you regularly deal with suppliers from particular country, opening a bank account in that market to allow easy and cost-effective payments might be a good idea.
Finally, a banker’s draft is essentially a cheque where you transfer funds to the bank which can immediately be paid to the supplier. You will be charged a fee of around £15 for issuing a banker’s draft.