Before the basics of export business procedures, Let’s see what is an export? The basic definition of export is the supply of goods to a destination outside the country of origin. These goods can be processed/ assembled and manufacturers. Some of the examples are as follows,
- Wholly produced products – Entirely produced in the country of origin ( Ex – Finished agricultural products)
- Not wholly produced items – Products in raw form (Ex – raw timber)
- Value-added items – Adding value to materials (Ex – ready-made fabric & garment items)
- process addition – (Ex – Food & beverage products)
Above are the basic types of products in the export industry. Now, let’s consider the components of an export,
- Product (Commodity) – The product you choose to export
- Shipper (Exporter)
- Consignee (Buyer) – Buyer of the product/importer
- Customs – Customs is the authority in a country that is responsible for collecting tariffs & controlling the flow of goods into & out of the country.
- Ports – harbors & airports
- Licensing & permitting authorities – Depends on the product, sometimes you have to obtain permissions/licenses in order to export.
- Export standard regulatory authorities – Standards that ensure the quality & safety of the product. Sometimes the buyer may request these standards for your product. (Ex – ISO standards)
Export business procedure
Exporting a product from a country to another country is not a simple process. You have to follow several steps associated with the above components. First, you have to get registered as an exporter in your country. Then according to your product, you have to register your product & obtain the required license/ certificates. This depends on the product you export & the government regulations. For example, if you export tea from Sri Lanka you have to get registered in the Sri Lanka Tea Board. Likewise, these regulations depend on your country. So you should check all the export regulations required for your product.
Finding a buyer
Then you have to find a buyer for your product. Now there are online platforms to find buyers for exporters (Click here to see). Besides that, there are several methods to find buyers such as personal contacts, Local & foreign institutions, the internet, foreign trade tours &, etc).
The exporter & the buyer must select an approved method of payment for the transaction. The recommended method is making & receiving payments via a bank. The following are some methods of payments in international trade.
1. Advance payment
The buyer remits money to the exporter before the shipment of the goods. This is a risky method as this completely depends on trust.
2. Letter of credit (L/C)
This is a document present by the buyer’s bank on behalf of the buyer. From this, the issuing bank assures the exporter that the issuing bank will make the payment on the international trade conducted. L/C method is the most acceptable method of payment to both the exporter & the importer.
3. Documentary collection ( D/P terms – Documents against payment)
In this method, first the exporter makes the shipment. Then he sends all the shipping documents to the buyer’s bank. After that, the buyer checks the documents & makes the payment. Then the exporter receives his payment.
4.Documentary collection (D/A terms – Documents against acceptance)
This is very similar to the D/P terms. But the buyer receives a time period for the payment. Therefore this is a highly risky method.
Here the payment is done via a consignment account. First, the exporter ships the goods. Then the buyer remits money to the consignment account soon after the shipment is confirmed. Then the exporter receives his payment after a time period. Both the buyer & the exporter agree on this time period when the account is opened.
After finding a buyer, the exporter must prepare a Pro-forma invoice & send it to the buyer. The Pro-forma invoice includes all the necessary information of the transaction such as,
- The product description
- Quality & the quantity of the product
- Terms of payment ( method of payment, if the transaction done by a bank, details of the bank, the payment, advancement payment & etc)
- terms of delivery
- packing & marking details
If the buyer accepts the Pro-forma invoice, it becomes the sales contract between the exporter & the buyer.
After setting up the sales contract. The procedure can be illustrated as follows,
Step 1 – Sales agreement
Exporter prepares the Pro-forma invoice & sends it to the buyer. If the buyer agrees, the buyer sends a copy of the acknowledgment to the exporter. Then it becomes the sales agreement.
Step 2 – Application for payment (L/C)
The buyer applies for an L/C from the buyer’s bank (issuing bank) in favor of the exporter.
Step 3 – payment advice (Issuing the L/C)
The issuing bank sends the L/C to the exporter’s bank (advising bank).
Step 4 – Advising L/C
Issuing bank sends the L/C to the exporter.
Step 5 – Shipment of goods
When the exporter receives the original L/C, he ships the relevant goods to the buyer.
Step 6 – presenting the documents
The exporter hands over all the original shipment documents to the advising bank.
Step 7 – presenting the documents to the issuing bank & exporter receives the payment
The advising bank properly scrutinizes all the shipping documents matching with the L/C terms. If the documents are correct, then the issuing bank debits the amount of the bill to the exporter’s account. Then the advising bank dispatches the documents to the issuing bank.
Step 8 – Release the documents to the buyer after the payment
After receiving the receipt letter of credit value from the buyer, the issuing bank releases the documents to the buyer. Then the buyer hand over the documents to the carrier/customs & clears the goods.
The above-described procedure is the exporting using the L/C method as the payment procedure. This is the most common method used by lots of exporters, apart from this, there are some other procedures as well. Click here to learn more.
Here we have discussed the very basics of export business. There can be different methods compared to this also. But this is a basic reflection of the general exporting procedure used in most countries in the world.
If you have any clarifications / questions feel free to comment below.
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