Exporting goods overseas is a good way of increasing your business’ customer base but if you’ve not exported outside the UK before there are a number of issues and factors you need to consider.
Getting the goods there
There are four methods of transporting your goods – rail, sea, road and air – and you’ll need to consider which is the most appropriate for your circumstances.
The choice of transport will depend on the type (and size) of goods you’re transporting, how quickly you need the goods there, how much flexibility you need on routing and how much you (or if appropriate, your buyer) can afford to pay for the transport. For example, rail and sea are both quite inflexible on routing but sea is a lot cheaper than air. Transport by sea also has the advantage that containers can be lifted off the ship and used for onwards transportation.
The logistics
When exporting goods, it is quite likely that the routing of the goods to their ultimate destination will not be straightforward. For example, the goods might be picked up from your warehouse by a haulier, driven to a port and loaded onto a ship, unloaded at the destination port and then driven to their final destination.
Although many carriers maintain insurance policies it’s unlikely these will cover the full value of the goods and you or your buyer will therefore need to put in place additional insurance.
There are also customs duties to be paid as well as port duties and taxes and (depending on the type of goods) both import and export licences might be necessary.
Finally, it’s absolutely vital that all of the right documentation is put in place to allow the goods to leave the port.
Who is responsible for what?
There are numerous ways of dividing responsibilities for the above logistics between you and your buyer. For example, you might agree that your buyer will collect the goods from your warehouse, and be responsible for all the costs and arrangements of getting the goods to the destination.
At the other extreme, you might agree that you will be responsible for all the costs and arrangements.
More commonly, you will agree a division of costs and responsibilities. For example, you might agree that you will deliver the goods on board the ship and insure them up to that point and the buyer will arrange shipment, insurance and onward delivery from the destination port.
To reduce the number of detailed provisions in your sale contract regarding logistics, you can make use of the trade terms defined by the International Chamber of Commerce. These are known as Incoterms, the latest set being Incoterms 2010 (which contains 11 separate terms).
Each Incoterm is a shorthand way of stating how responsibilities are divided. For example, EXW (Ex Works) means the goods are collected by the buyer from your warehouse, FOB (Free on Board) means you will place the goods on board a ship nominated by the buyer, with the risk and all costs passing at that point, and DDP means you will be responsible for delivering the goods right through to the nominated destination, paying for all carriage, insurance, import duties and taxes and export duties and taxes.
Your sale contract should identify clearly both the applicable Incoterm and the port or destination to which you are expected to deliver.
Paperwork
No matter what form of transportation you use when exporting goods, some form of waybill will be required. For example, if exporting by sea, you’ll need a Sea Waybill or Bill of Lading. These set out the terms of the contract of carriage as well as identifying the consignment owner.
In addition to the waybill, you may also need various other paperwork, depending on the nature of the goods – for example, export licences, proof of origin, dangerous goods paperwork and proof that the goods meet local product standards. You should ensure you understand fully all the documentation you need – without it your goods may be prevented from leaving the port.
Getting paid
You might be used to giving credit to trusted customers within the UK but you’ll probably need to be more cautious when exporting goods, particularly if you’re shipping outside the EU. Even within the EU you’ll face the additional costs of enforcing a judgment in a foreign court in the event of non-payment and you always have the risk of your buyer becoming insolvent.
Therefore, unless you have a good trading relationship with the buyer or trust its creditworthiness, you should consider using a Bill of Lading rather than a Sea Waybill. These are more expensive than Sea Waybills but will allow you to retain control of the goods until you release the Bill of Lading to the buyer (e.g. once you’ve been paid).
You should also consider reducing your risk by demanding payment in stages; for example, a deposit with the order, the majority of the balance on proof of shipping (but before the Bill of Lading is released) and possibly (depending on the nature of the goods) a small retention to be released as soon as the buyer confirms acceptance of the goods.
You can also consider opening a Letter of Credit. This involves the buyer’s bank guaranteeing that payment will be released to you once all of the agreed paperwork (e.g. Bill of Lading) is shown to your bank. An alternative form is the Standby Letter of Credit, under which the banks simply guarantee that if the buyer doesn’t pay, then they will.
In addition, your own bank may add its “confirmation” (i.e. guarantee) to the payment and the UK Government operates a Letter of Credit Guarantee Scheme to encourage UK banks to do so.
Letters of Credit give you additional comfort that you will be paid (subject to the banks honouring the Letter) but they involve additional cost and you need to ensure the documentation presented to the bank is complete and accurate in all respects. But you may want to consider them for particularly high value goods.
VAT
You will need to discuss VAT with your accountant as the treatment of VAT on exports is different from VAT on domestic sales.
For example, you may be able to zero-rate goods you export outside the EU.
Even within the EU, you may be able to zero-rate goods, provided you’re shipping to a VAT-registered buyer.
Freight Forwarders
Many exporters use the services of a freight forwarder.
Freight forwarders will manage booking cargo with the carriers. Some freight forwarders even have their own road transport and can carry the goods themselves.
They will also prepare and check bills of carriage, arrange insurance (they often carry their own marine insurance policies), arrange storage, arrange customs clearance (and try to minimise customs charges) and maintain documentation.
In addition, a freight forwarder may be able to consolidate consignments to reduce costs when shipping by sea.
Matt Worsnop is Corporate Solicitor at BHW Solicitors in Leicester and writes regularly on corporate and commercial matters. Matt can be contacted on 0116 281 6235 or by email at matt@bhwsolicitors.com.