I classify international banking and international shipping together because for an international business that buys and resells materials, the two are interrelated. It is necessary to have a bank and a freight agent that has a lot of experience in international business. Do not use a small local bank as they cannot meet your need when it comes to doing business outside the United States. They claim they can, but this bank will just subcontract your business out to one of the big banks such as Citigroup, Key Bank, JP Morgan, and Bank of America. You will end up paying higher fees, and it will take longer to have your paperwork processed and approved. This all means a loss of profit dollars in higher bank fees and communications problems. This can cost you a lot of wasted time. Bank fees can run as high as 7 percent of the transaction value.
The bank you select should have banking relations with the banks in the foreign countries you will do business with, for either exporting or importing. A banking relationship means these banks have established formal business relationships and they know how each other operates. International banks have a list of banks in each country they do business with. For example, if I want to sell to a company in Korea, I must know the name of their bank. Then you need to check with your bank if they have direct relations or indirect relations with this bank. Key Bank in the United States may have relations with Bank of Korea and not the customer’s bank, which happens to be Korea Exchange Bank. Or Korea Exchange Bank may have relations with Bank of Korea New York Branch in the USA but not with Key Bank directly. This direct or indirect relationship is important as paperwork and money flow through these banks. If they do not have a direct or indirect relationship, then they cannot transfer documents and funds. Indirect bank relations also cost you more in fees than a direct bank relationship. So it is better if your bank has direct banking relationships with the customer’s bank to reduce your banking fees for international transactions.
It is very important to have a shipping agent or freight forwarder that knows how to do international business and has good relations or contacts with the major freight airlines and shipping companies. Your freight agent can make or break your business. Your shipping agent needs to know the international shipping regulations. If he provides bad service and is late with shipments, your company will obtain a bad reputation with the customer. The agent must know how to make a correct bill of lading and then forward this bill of lading to you right away. Your agent must be licensed for air and ocean freight. They also need to be bonded.
The bill of lading is very important as this is the proof that the correct goods were shipped, what date they were shipped, the arrival date, and the name of the carrier. The description of the goods on the bill of lading must match the letter of credit and the invoice description. The bill of lading is a legal document that is necessary to obtain payment from the bank.
There are several safe methods used to do international transactions when receiving or sending payments for goods: a. Letter of credit b. Documents against payment or D/P c. Documents against acceptance or D/A d. Net 30 days based on invoice date or bill of lading date e. Payment in advance of shipment by international wire transfer of funds.
I will discuss these payment methods in future articles of International Business, look for Letters of Credit next..