Trading with foreign suppliers raises a number of issues you may not be familiar with from trading within Canada. Typically, these include language differences, new payment methods and increased paperwork requirements.
However, with a little research and planning these challenges are easily overcome. Widening your purchasing to the international market can give you a significant competitive advantage. Using foreign suppliers can lower your input costs and give you access to specialised goods and materials that may not be available in Canada.
This guide contains basic information. It outlines the differences you need to take into account when starting to trade abroad. It takes you through the key steps in finding and selecting foreign suppliers, and explains what to look for in terms of payment methods and drawing up contracts.
The challenges of sourcing abroad
Trading with foreign businesses differs from trading within Canada. New challenges are raised by the distances involved, by variations between countries, and by rules that govern international trading.
It's not safe to assume that the same rules will apply abroad as in Canada. Factors to consider include:
- whether there are import or export restrictions at either end of the transaction
- whether technical standards in your supplier's country meet Canadian requirements
- who is liable if a product causes harm or loss
- whether your imported goods infringe any intellectual property rights
- who bears insurance costs at each stage of transit
A well-drafted written contract will help to avoid disagreements or disputes. See the page in this guide on drawing up contracts with foreign suppliers.
There is a range of other factors you should bear in mind:
- Language differences matter. It's not just a question of communication - make sure any labelling or other printed materials are error-free.
- Payment methods for international transactions are a bit more complicated. See the page in this guide on methods of paying foreign suppliers.
- Shipping procedures are also more complex, given the increased distances and the need to cross borders.
- Understanding the business and social practices of your supplier's country can help build trust and develop relationships. However, remember that Canadian consumers may judge you on the business practices of your suppliers.
- Think about how many suppliers you need. If you have too few you risk suffering supply-chain disruption if they have problems. If you have too many your managerial burden will increase.
The origin of your goods can affect the level of duty you pay. Some goods attract a preferential rate of duty, so you need to check where your supplier's raw materials have come from. Visiting suppliers is the best way of doing this.
Finding foreign suppliers
As with finding a domestic supplier, careful research is key to identifying foreign suppliers. You will have to identify countries to trade with, as well as individual suppliers within those countries.
Identifying suitable countries
For most goods and materials you can choose to import from a wide range of countries. Expect a trade-off between prices and levels of regulation and protection.
Suppliers in developing countries may be cheaper but it may be more difficult to resolve any problems. Factors that should influence your decision include:
- familiarity with the country - knowing your target country and having contacts within your sector there makes doing business easier
- communication - if you (or your employees) don't speak the local language, check that English is widely spoken by businesses, or whether there are translators and interpreters available
- level of development - it's generally easier to trade with developed countries than with developing ones
- how far away the country is - this affects shipping costs, the length of your trading cycle, and the ease of visiting suppliers if necessary
- levels of existing trade with Canada - high volumes suggest other businesses have successfully chosen the route you're considering
Identifying suitable suppliers
There are many sources of information about potential suppliers, including:
- our Strategic Information Centre
- trade associations for your sector
- other importers in your sector
- banks' trade services departments
- overseas trade visits and exhibitions
- your target countries' embassy in Canada
- membership organisations for businesses trading between Canada and your source countries
Remember you may need secondary suppliers to help with the trading process, such as freight forwarders or import agents to handle shipping and customs-related formalities and documentation.
Choosing a foreign supplier
You should have the same priorities in mind when selecting a foreign supplier as when choosing a Canada-based one. You need to get the right price and quality, while making sure the supplier can be relied upon to meet high standards consistently.
The reliability of your supplier is crucial. While a competitive price is also important, make sure that low prices don't come with unacceptable compromises on quality or on the level of service you'll receive.
The main stages in the supplier-selection process are:
- drawing up a shortlist
- comparing the short-listed suppliers on the basis of value for money, reliability and creditworthiness
- visiting the suppliers, if possible, to see their operations
- deciding which of the suppliers to work with
Value for money
Make sure that you're happy with the price and quality the supplier is offering. Get a written quotation.
Ask for a sample based on your specification to make sure the supplier is capable of producing what you need.
It's important to research supplier reliability. If possible, visit the supplier. Look at their work and their production system.
Find out as much as you can about the supplier. Talk to:
- any Canadian references the supplier can give you
- Canadian importers with experience in the market
- trade associations and other importers in your sector
- member organisations for Canadian businesses trading with the market
You should also check the reliability of any sub-contractors your supplier may be outsourcing work to.
Financial checks of foreign suppliers can be difficult due to a lack of accessible financial information. See if your bank's international trade team can carry out a status query - a query into the company's financial standing on your behalf.
Be cautious - avoid advance payment or long-term contracts until you trust the supplier. See the page in this guide on methods of paying foreign suppliers.
Building solid relationships with foreign suppliers
Trust is a crucial element of any supplier relationship. While it can take time and planning to build a solid relationship with foreign suppliers, doing so makes it more likely that you'll do increased business with them. It may even enable you to negotiate more favourable terms.
Build trust gradually
The key is to build the trading relationship slowly. Initially you should leave nothing to chance. Draw up written contracts that are clear and unambiguous. See the page in this guide on drawing up contracts with foreign suppliers.
Typically your first contracts with a new supplier will be on a project-by-project or shipment-by-shipment basis. As the relationship develops you may move to longer contract periods and potentially be able to negotiate better terms.
An important part of building trust is learning how things work in your supplier's country. Are there important cultural and social differences, or differences in the way business is done?
Communication is an obvious potential obstacle when dealing with foreign suppliers. Even simple actions such as routine telephone calls can be complicated by factors such as time differences and low-quality phone connections.
Face-to-face meetings are likely to be infrequent, but they can be vital to the trust-building process - so plan them carefully.
In addition, there are potential language barriers. Which language will you use with your supplier? Do you have enough foreign-language speakers in your workforce? Do these employees have the skills they'll need to deal with your suppliers? Would it help to use local interpreters, especially for key meetings, to avoid misunderstandings?
Monitor, review and adapt
Make sure you monitor key aspects of the new supplier relationship. This will make it easy to identify areas for possible improvement.
Schedule progress reviews with the supplier. If there have been any problems, decide together how to resolve them. If everything has been working smoothly and profitably, you may want to extend the level of business you're doing together.
Methods of paying foreign suppliers
There are four main methods for paying foreign suppliers for the goods you import from them - or for receiving payment if you're exporting abroad:
- Advance payment. The supplier only ships goods once payment has been received.
- Letters of credit. The importer's bank guarantees to pay when presented with a set of specified export documents by the supplier - the bank guarantee increases the cost of this method.
- Documentary collection. When goods are shipped, the supplier sends the export documents to the importer's bank. These documents are only given to the importer when payment has been made.
- Open account trading. The supplier ships goods to the importer, and asks for payment within an agreed period.
Minimise payment-related risks
For importers, the risk decreases as you move down the list above. Advance payment is the riskiest - there is a chance you'll pay but never receive the goods. Open account trading is the least risky - you only pay after receiving the goods.
For exporters, however, the risk increases as you move down the list. So while you might prefer open account trading, your overseas supplier may want advance payment. Letters of credit and documentary collections offer some protection to both parties by involving their banks as intermediaries in the process.
The International Chamber of Commerce has established rules governing documentary credits worldwide. The Uniform Customs and Practice for Documentary Credits (UCP500) is a set of internationally accepted rules on the issue and use of letters of credit. These rules are commonly used by banks in commercial transactions worldwide. As they are incorporated into contracts voluntarily, the rules are flexible, but once applied to any documentary credit, they are binding on all parties to the credit, unless specifically modified or excluded by the credit.
Match payments to cash flow needs
Payment methods can have a major impact on your cash flow position. Most banks offer import finance packages to bridge the period between paying for your imports and receiving payment when you sell them on to your customers.
Bear in mind that payment methods and terms are frequently a matter of negotiation. For example, you might offer a supplier a letter of credit in return for an extended 75-day payment period to match your cash flow requirements.
Drawing up contracts with foreign suppliers
There are many sources of potential confusion between an importer and a foreign supplier, from language difficulties to differences in business practices.
Drawing up a clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement.
Your contract should make all aspects of the trading process as clear as possible - what will happen, when it will happen, and exactly what each party is responsible for at each stage.
There are standard trading practices and systems to help you agree on key issues. Incoterms are an internationally recognised set of trading terms used in contracts of delivery. Special trade-related payment methods reduce the risks and uncertainties of international trade.
What to include
Key things to cover in a contract with a foreign supplier include:
- Goods. Specify what goods are being bought, noting any legal or technical rules with which they must comply.
- Price. How much will you pay? In which currency? At which exchange rate?
- Payment method. When and how will payment be made? See the page in this guide on methods of paying foreign suppliers.
- Delivery. How will the goods be transported to you?
- Trading terms. Use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities. You can find out about Incoterms on the International Chamber of Commerce website.
- Insurance. Be clear about who bears what risks - e.g. loss or damage - at each stage of the process.
- Potential problems. Include procedures that would be implemented if a dispute arises, e.g. if one party's error causes delays or losses for the other.
- Service level agreement. Define the level of service your supplier must provide.
- Legal jurisdiction of the contract. If there is a dispute, where would legal proceedings be heard?
Bear in mind that the contracts you enter into with a supplier will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as familiarity and trust develop.
Original document, Manage overseas suppliers, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs