5 points Australian SMEs must consider before importing from China

Australian businesses looking for lucrative import arrangements are expected to flock to the huge Canton Fair, China's largest import/export exhibition, which takes place this month in Guangzhou, the hub of Chinese manufacturing.

Head of Trade Finance at Scottish Pacific, Craig Michie, said growing numbers of Australian SMEs were taking advantage of import opportunities, particularly in China (in 2013 Australia's trade import figure reached $320 billion. Of the 390,000 businesses that attended the Canton Fair in 2013, more than 11,000 were Australian).

“Many of our clients attend the fair and take the opportunity to connect their suppliers with our local staff.  The difference this makes to communication and transaction flow enables suppliers to get paid more quickly and our clients get their goods without the confusion and delays that can often occur,” Mr Michie said.

To coincide with the 115th Canton Fair (Phase one, April 15-19), Scottish Pacific Tradeline offers these five tips to prevent first time importers from making costly business mistakes.

5 tips for first time importers from China

1.       Understand when you are responsible for the goods. (insist on the appropriate Incoterm)   Incoterms (such as FOB – Free On Board, CIF – Cost Insurance Freight, EXW – Ex Works) determine the tasks, costs, and risks for the buyer and the seller associated with the transportation and delivery of goods. The incoterm will determine when the importer is responsible for the goods and accordingly what insurances are required.

2.       Take out adequate insurance   Once the importer knows when they are responsible for the goods (via the Incoterm), it is important to ensure they have the cargo covered. A common myth is that the Freight Forwarder engaged to facilitate the import will carry insurance. They don’t! Unfortunately marine shipping containers do get lost. As recently as February, 500 shipping containers  were unaccounted for when the vessel Svendborg Maersk was struck by high wind and waves off the coast of France.

3.       Hedge currency risk Most import transactions with China are completed in US dollars. Value fluctuations in AUD versus USD have the potential to seriously harm gross profit margins. To avoid this risk, importers should work with currency providers to set up Forward Exchange Contracts that lock in an exchange rate.

4.       Complete a pre-shipment inspection  Ideally an inspection of the goods should be completed on all shipments. This is even more important when dealing with a new supplier. Once the goods are shipped, it is difficult to arrange for return and obtaining a credit or a refund can be even more difficult.

5.       Understand the impact on cash flow  Buying from overseas suppliers can sometimes deliver exceptionally strong gross margins. However the impact on cash flow is very different to buying from a domestic supplier. Significantly longer cash cycles are involved, requiring much greater levels of working capital.

Mr Michie said one of the key success factors for importers is understanding the cash flows and finding the right type of finance to facilitate importation.

"Scottish Pacific’s Tradeline can be used for importing of goods for resale, supplementing existing trade facilities and assisting with the acquisition of imported plant and trade equipment," Mr Michie said.

"Tradeline has the advantage over other types of funding because facilities can be put in place quickly, don’t interfere with existing finance arrangements and are not reliant upon real estate to secure it," Mr Michie said.

Australian importer case study: Korr Lighting

This Australian lighting business is tracking for quadruple growth figures after securing a combination of trade and debtor finance to fund an opportunity to supply major retailers

In mid 2013, Korr Lighting was in a comfortable position, profitable and growing at 25% per annum, when directors Kirk Buckley and Cameron Cross had a decision to make: continue in the same vein or accelerate their expansion by taking advantage of an emerging opportunity to supply major retailers.

Moving into this space would involve importing significantly higher volumes of product and ensuring its availability in Australia at short notice.

“If you can’t supply the majors with the goods and the quantities they need, they move on very quickly - you almost become their bank,” according to Mr Buckley.

Having decided to pursue the opportunity, the directors explored funding options available through their broker, David Pratt at A Class Business Finance.

Scottish Pacific were recommended, because of the speed with which they were able to put in place a debtor finance facility and because they were considered to be easy to work with. It was a bonus to the Korr directors when they raised the idea of providing separate credit facilities to assist with payment to the Chinese suppliers.

“Looking back, the debtor finance facility alone wasn’t going to be enough,” said Mr Buckley. "And the two facilities work well in tandem with one another.”

Funding from Scottish Pacific enabled Korr Lighting to double its turnover in the current financial year and to budget for the same rate of growth again in FY15.

"The fact Scottish Pacific has a Chinese office has been a value add. Their communication with our suppliers has been excellent. You know it’s working well when you don’t hear anything,” Mr Buckley said.

Along with many other Australian importers, Korr will be at the Canton Fair again this year.

“You can’t not go. Everything is new every year and technology is moving forward. Attending does two things. It introduces you to new products and it tells you if your current products are behind the times.”

Scottish Pacific Tradeline is a flexible and effective alternative to traditional trade finance, helping a wide range of businesses to stock, and grow, their businesses. Tradeline offers quick approval (usually within 5 business days), with less restrictive and more flexible (up to 90 days) terms. It can be unsecured, meaning there is no need for the home as security. Privately owned and independent of the banks, Tradeline is backed by Scottish Pacific Debtor Finance with over 25 years of supporting Australian and New Zealand businesses. Scottish Pacific was named Best Cashflow Lender in the 2014 Adviser Non-Bank Lending Awards, as voted by brokers.

Canton Fair -  or China Import and Export Fair, is held biannually in Guangzhou every spring and autumn. Phase one starts April 15-19. The Fair, with the broadest distribution of overseas buyers and greatest business turnover in China,  attracts many Australian businesses each year.

www.sptradeline.com.au/

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For more information contact:

Kathryn Britt, Cicero Communications

Tel: 0414 661 616