Why Overlooking International Trade may be an Entrepreneur's Greatest Mistake
How to Minimize Risk of Nonpayment
As one of the most profitable industries in the world, International Trade continues to provide opportunities for those who understand the law.
International Trade is an often overlooked aspect of business for entrepreneurs. According to the US Export-Import (EXIM) Bank, only 1% of all US businesses export their goods or services. Despite this profound lack of participation by businesses, international trade is a trillion dollar industry. More money is being made and transacted outside a country than in that country, including both the US and China - the two largest economies in the world. However, most entrepreneurs are not involved in International Trade primarily because of the fear of not being paid for the goods they ship globally. In the article, we discuss ways to minimize the risk of not being paid in international trade.
I. Sales Agreement
Before an entrepreneur exports any products, it is important to have a contract with the buyer of your products. The main contract is the sales agreement, which is traditionally a standard invoice. The invoice may begin as a proforma invoice which provides an estimate of the costs of the transaction. Eventually, the agreement will form into a final invoice which operates as a legal contract that both the exporter and buyer sign.
The sales agreement and letter of credit are two very important contracts in international trade that entrepreneurs need to understand.
The Sales Agreement and Letter of Credit are two very important contracts in international trade that entrepreneurs need to understand.
The sales agreement can also be a more formal legal contract and include:
Dispute resolution methods involving international arbitration,
Indemnity clauses for adequate legal protection,
Proper termination clauses, and
Force majeure clauses.
It is important to note even if both parties don't sign the invoice, a legal relationship can be formed if both parties conduct themselves in a way that two agreeing parties act.
The sales agreement is one of the initial contracts in international trade to minimize risk while exporting goods. Exporters can combine the sales agreement with the letter of credit to minimize risk of nonpayment.
II. Letter of Credit
A letter of credit has legal significance and it greatly reduces the exporter’s risk of nonpayment. This financial mechanism is also a legal contract with legal terms that are separate from the sales agreement. It guarantees that an exporter will be paid because if the buyer does not pay the exporter, the bank will pay the exporter. Most banks around the world are familiar with a letter of credit as it has been a common international trade document for a very long time. Therefore, instead of relying on the word of a buyer, exporters can have the buyer get a letter of credit from a bank to minimize the exporter’s risk of nonpayment. Risk of nonpayment can also be drastically lowered with Export Credit Insurance.
III. Export Credit Insurance
As international trade grows, Export Credit Insurance is becoming increasingly important.
As international trade grows, export credit insurance is becoming increasingly important. The US Export-Import (EXIM) Bank offers credit insurance, a great way for exporters to minimize the risk of nonpayment from buyers.
Many countries have an export credit agency such as an EXIM Bank and it offers legal protection in this trillion dollar industry. If a buyer fails to pay the exporter, the EXIM Bank will pay the exporter up to 95% of the value of the sales agreement. EXIM banks typically offer this insurance at affordable rates, and it will drastically reduce the risk for exporters involved in international trade.
International Trade is an industry that is growing and new Free Trade Agreements have recently passed such as the:
African Continental Free Trade Agreement, and
Regional Comprehensive Economic Partnership in Asia.
It is a great time to get involved in the international trade.
Geremy Johnson, Esq. is a trade lawyer that offers various trade legal services. Please contact him with your trade and legal needs.