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Back to Trade Basics For Importers

Perhaps the most important element in importing is the contract. Here are four key pieces of information that will help you ensure that the process goes smoothly.

 

Managing Trade Risk

Commercial practices and financial systems differ widely between countries and, overall, the risk issues associated with overseas trading are wider in scope than in domestic commerce. Discussion of risk tends to focus on the exporter's position - that is, on the buyer's creditworthiness and ability to pay for the goods once shipped. But what about risks to an importer? When you purchase goods from a foreign supplier, you will need to consider the impact of foreign currency exchange, transport, insurance, and customs duties on your profit margin. The list below summarizes some of the risks that you might encounter.

  • Risks In Transit - Will the shipment arrive undamaged and in good order?
  • Currency Risk - Can fluctuations in exchange rates be accounted for? Will the terms that you have negotiated put you at risk of currency fluctuations?
  • Interest Rate Risk - If the terms of payment are fixed, will a change in interest rates affect your ability to pay?
  • Documentary Risk - Will your shipment be subject to delays at customs if your supplier fails to prepare required documentation? Are the goods perishable?

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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 financial 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 to prevent misunderstandings by employing the International Chamber of Commerce's international codes of practice

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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.

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Elements of a Sales Contract

For small purchases across borders, you may simply ship the goods by courier using credit card payments or wire transfers. For a larger transaction, however, 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

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Improving Cash Flow

Paying cash in advance isn't your only option for cross border purchasing. If you are paying your suppliers in advance, you may be needlessly tying up your cash resources while the goods are in transit. Here are two alternatives that can save you from having to extend your line of credit.

  • Arranging Terms - If you are making payment using a letter of credit or foreign collection, the exporter that you are dealing with may be willing to extend credit terms. This will allow you to take possession of the goods while delaying payment for the period until maturity, usually for 30, 60, or 90 days.
  • Open Account - If you have a contract for regular orders from a supplier, you may be in a position to discuss open account trading. In this case, your supplier sends goods along with an invoice, waiting for payment until you have received the shipment. Again, the terms are normally 30, 60, or 90 days.

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Canadian Customs

If your supplier doesn't clear the goods through customs, you will need to investigate the tariffs and duties that apply to your shipment. This can be a complicated business, and you may want to consider consulting a Customs Broker.

In addition to the cost of your purchase, you may have to pay duties - taxes associated with importing that include customs duty, excise duty, and the goods and services tax (GST). This list highlights the customs issues outlined in Revenue Canada's Guide for Canadian Small Business on importing. For more information, visit Revenue Canada's Small Business Page (opens new window) .

  • The duty that you will pay is determined by the place of origin and tariff classification of the goods that you are importing. You will likely need to fill out a form known as "Form B3, Canada Customs Coding Form", which will include information on tariff treatment and classification, as well as the value of the goods (for duty) in Canadian dollars.
  • Some imports require health certificates or permits from other government departments. If this is the case, the Canadian customs office may refer shipments to the appropriate department before releasing them.
  • Some categories or goods will not be permitted entry into Canada if they are not marked with their country of origin, i.e. "Made in...". If you have any doubts about whether the goods you are importing are admissible to Canada, give your local customs office a call before you finalize the purchase.
  • To benefit from lower duty rates under trade agreements like NAFTA (North American Free Trade Agreement) or CIFTA (Canada Israel Free Trade Agreement), you may need to produce a certificate of origin from your foreign supplier.

Revenue Canada offers a variety of trade incentives to reduce the duty you pay on imports. Many of these programs are targeted to companies importing goods that will eventually be exported, either in the same condition or further manufactured. Other incentives include the Machinery Program, which allows qualified companies to import machinery duty-free if it is not available in Canada.

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