Nicole asks

When it comes to importing many things by the container, how shall I pay? What is the best and safest way to handle payment? Do I still use a letter of credit?

My reponse

I would definitely think about a letter of credit if you’re shipping by the container load. A letter of credit will help you to negotiate with the supplier if the goods aren’t what you expected, arrive late, etc.

Her follow up

When I use a letter of credit at my bank, will I also purchase other insurance? I’m trying to get an idea of the payment method, just because I’ve heard stories from one importer in particular who received an empty container from Thailand. The best part is that he paid up front, as requested. And so, that importer advised me to get an insurance company to deal with payment. He also advised me to be there (in country) to take pictures of the packaged container and locked and sealed container. I won’t let these stories scare me, though. Instead, I want to be prepared that the company in Thailand I choose, won’t rip me off. So, is the letter of credit all I need? And, if the company refuses? eg. “I’d like the money upfront.” or “I’d like 50% now.”

From my response

By using a letter of credit, you’re basically giving your payment to a third party who will help verify that your supplier upholds their end of the agreement. They don’t get paid until the third party (the bank holding the letter of credit) verifies that they’ve met all the terms of the contract (e.g. your container is not empty). You will still want to consider insurance to protect against things that the supplier might not want to be liable for – like if the shipment is damaged or lost in transit. For large shipments worth a lot of money, use both.

What do you think about all the China recalls… the bad dog food, toys, etc… even the recent “Aqua Dots” recall… do you think this has hurt the import business, or will hurt the Chinese import business in the future?

Answer

I have a daughter myself, so the recalls from China were a big deal to me. It seems like every toy she owns comes from either Taiwan or China, and I hated the thought of going through and tossing/returning the toys that she loves.

On the other hand, I’m just not that surprised that it happened. With the cost-cutting mindset of corporate America, we see corners like this get cut all the time. The fact that it came from China just gives the media a focal point. Those toys could have just as easily been coming from domestic industrial facilities.

My rant aside, you asked if I think it has hurt or will hurt import businesses in the future. While I think it has affected import businesses in the short term, I think the long-term effects of recalls from China will be minimal. In the short term Customs will probably increase inspections on certain profiled shipments which will lead to import delays and rejections, but I don’t believe those will have a long-term impact. Of course, we’ll also see some of the larger importers under scrutiny lose suppliers. That in itself will have its own positive effect on their competition.

In the really far out future, the biggest benefit will probably come from the importers themselves as they tighten their quality control on imported products. Do keep in mind, however, that quality vs. costs in business tends to be cyclical and we should be on the lookout for more of the same once the media attention dies down.

To answer your hidden question, I don’t think we’ll see a decrease in imports. China is still one of our largest trading partners and will continue to be for as long as they can keep their production costs below ours.

When all was said and done, the big question Gary had on his mind was whether or not he could make this thing work without getting clobbered and sunk by some unknown and unforeseen roadblock – a very typical concern with any new business venture. We then spent the next thirty minutes or so running down the list of stumbling blocks and addressing them one by one.

I’ve summarized the main points below, but first…

Here’s Gary’s original email

Hello Keeton ~

My name is Gary and I have a question for you if you don’t mind. I am thinking seriously about starting an import business from Vegas, and wanted your thoughts and opinion on if you think this is a good or bad idea. I have been to China 3 times in the past few years, and as such, have gained an extraordinary respect and appreciation for Asia and its people. Last summer I spent about a month in Shanghai… almost opened a night club and restaurant there with 4 Chinese partners, but opted out. I have always wanted to do business with Asia, and I think this may be the right move.

And, I have founded and ran several companies over the past 17 years in Houston… but moved out to Vegas about 6 months ago to begin a new chapter in my life. I have developed strong contacts here in the hotel, casino and restaurant industries… and over the years have created a strong network in China as well, including being good friends with a guy in Houston who has an import business now. I just got to thinking that this may be the perfect business for me to start up?

I just read over your web site this morning and you just seemed like someone that has a strong company, and may be able to give me your thoughts and advice if you could… I guess the point is, or main question would be, do you think it’s a good idea for me to open this kind of business??

Xie xie ni!

–
Sincerely,

Gary

The main points

Here are the two main points from the conversation and how Gary intended to address them. These are the most often overlooked areas in the import industry, and once addressed the rest becomes a matter of paperwork. We went into bit more depth than what you see here, but this will give you the gist.

Marketing – What are you going to sell and who are you going to sell it to?

It sounds pretty straightforward, but I’m often surprised at the number of people who want to get into the import industry, but don’t have a product in mind. Normally my recommendation is to pursue something that the potential importer has experience in so that they can more readily identify advantageous pricing, quality, and a potential market. While Gary was unsure what product he was going to import, he addressed the issue with a strong background in sales, marketing and business operations and would apply those to first finding a receptive market, determining a price point and then addressing their product needs.

Product Sourcing – Where are your products going to come from?

This is a huge stumbling block for first time importers. If you’re bringing products into the US, they have to come from somewhere. In Gary’s case the intended origin of his potential products was Asia, or China to be more precise. The problems most importers face here are finding the suppliers, negotiating, and figuring out who to trust. Much of the time this involves “knowing a guy”, hiring a local middleman, or some fairly expensive international trips. Gary addressed the issue with previous overseas visits and the establishment of some local business contacts.

My follow up response

Hi Gary,

Thanks for the call!

From our conversation, I think you’ll do well in the import industry. Like I said, the local marketing and the international product sourcing challenges are the biggest stumbling blocks for most people in your situation. If you feel like you’ve addressed them already, then you’re definitely ahead of the game. Aside from those issues, my biggest concern would be knowing the ins and outs of import regulations for the specific products you want to import.

At this point, you should probably have a meet-and-greet conversation with a licensed US Customs broker and/or a logistics provider in your area (sometimes they have both in the same office). I would also start checking with financial institutions about an international financing tool called an irrevocable letter of credit.

See http://www.usimporters.org/irrevocable-letter-of-credit.html for an explanation.

Thanks again and best of luck! Let me know how it turns out and drop me a line anytime. I’m happy to offer as much advice to you as I am able.

Keeton

Email from the importer

Hi,

I realize this request might be a little unorthodox, but I am hoping to find some advice from an importer…especially since I will be in the market for a new one due to some recent issues that have taken place with a us importer I was working with.

I was hoping I could get your advice on something. I realize you can’t offer legal advice and I wouldn’t ask you to.

But as an obvious expert, I am sure you can offer your 2 cents. It would be REALLY appreciated.

I had worked with an importer to import toy balls from China. I had ordered 9 inch balls and he sent me samples.

He had explained to me that the purpose of the pre-production samples was so that there was no confusion with the product that I would ultimately receive. The samples I approve would be the product I receive.

As it turns out – the samples they sent me were larger than the size I was asking for but I did not know it. They sent me samples and told me that they were samples of a 9 inch ball. (I now know that they were 10 inches)

The order finally got here for my 10,000 ball order and they are not the same as the pre-production sample balls that I approved. They are smaller. They are the actual 9 inch balls that I ordered but I did not know what they would look like, because they sent me samples of a larger ball and represented them as the 9 inch ball that I would receive.

The balls I received were smaller than the ones I approved and the importer is telling me there is nothing he can do.

He said I ordered 9 inch balls and I got 9 inch balls.

My argument is that I did not know that this is what the 9 inch ball looked like because the samples they sent , I was told were 9 inch balls and they blew up bigger than 9 inches and I liked the way they look so I approved them based on that fact and the 10,000 balls I ultimately received are different.

They are the factory’s actual 9 inch balls but are different than the samples I approved. I am not trying to be the bad guy, but I thought the samples I got would be the product I received…. And that is what I was told. The Importer I worked with is not willing to do anything to get this fixed.

The main issues are as follows:

1. I want the product of the sample I approved – I liked the samples better.

2. I used the samples to take photos of the product for my website and promo material and now would have to change it all to match the size of the balls I received.

3. I have used the pre production samples to promote the business while waiting for the shipment to arrive.

Do I have any recourse? Have you ever experienced this?

Any advice you can offer would be greatly appreciated.

Thanks for your time in reading this email.

Best Regards,

Name Withheld

My response

Hi Name Withheld,

You’re not going to like my answer.

The best and most common way to avoid your situation is through a financing tool called a letter of credit. Essentially, the buyer finds an international bank and gives their money plus a fee to the bank along with a conditional contract. Once all the conditions on the contract have been met (goods received in good order per specifications, etc.) the bank releases the funds to the seller.

Since you didn’t mention anything about a letter of credit, I’m assuming you don’t have one. In that case your best recourse would be some sort of legal action, but that might cost more than the balls.

Does that make sense?

Keeton

Some important definitions

Irrevocable Letter of Credit
Letter of credit in which the specified payment is guaranteed by the bank if all terms and conditions are met by the drawee and which cannot be revoked without joint agreement of both the buyer and the seller.

Inspection Certificate
A certificate issued by an independent agent or firm attesting to the quality and/or quantity of the merchandise being shipped. Such a certificate is usually required in a letter of credit for commodity shipments.

Issuing Bank
Bank that opens a straight or negotiable letter of credit and assumes the obligation to pay the bank or beneficiary if the documents presented are in accordance with the terms of the letter of credit.

In some cases and with certain types of goods, an import license is required. Examples include alcohol, tobacco, firearms, animals, copyrighted materials, food and more. These items are regulated by the individual agencies governing that type of good. US Customs does not create the regulations, they simply enforce them for other agencies. In addition to the licensing of certain types of goods, the US Department of Homeland Security also regulates the licensing of Customs Brokers. A Customs Broker is an individual authorized by US Customs and the Dept. of Homeland security to transact Customs business on someone else’s behalf. Customs Brokers are extremely useful for first-time and experienced importers because they often have access to systems and knowledge to file Customs entries in an efficient manner and utilize importer best-practices to speed import clearances and reduce import duties.