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Chapter III. CREDIT IN IMPORTING

The buyer or importer of foreign products must maintain a satisfactory credit position. Foreign producers, manufacturers, and exporters cannot be expected to make shipments to American firms, except against irrevocable letters of credit, unless they can ascertain something as to the financial and moral rísk involved. The permanency of the business of the buyer or importer is an important factor. Foreign sellers are just as wary of fly-by-night firms in the United States as we are of those abroad. In addition to mercantile credit and bank references, the American buyer or importer will be expected to furnish commercial references or the names of foreign firms with whom he has done a satisfactory business in the past. On the other hand, the buyer himself must check sources of supply. Some exporters abroad are ready to draw against established credits, shipping goods that are not up to specification or sample unless adequate precautions are taken. This can usually be effected through established methods of requiring inspection certificates attached to shipping papers before drafts drawn against firm letters of credit are honored. At best, the moral responsibility of the foreign seller is the final safeguard for the importer, for no system can be devised which an unscrupulous exporter cannot circumvent if he desires to do so. Satisfactory dealings depend in the last analysis upon the good faith of both parties.

IMPORTER'S FINANCIAL STATEMENT The first consideration of every importer who acts in any capacity other than as a pure selling agent should be to establish his credit. If he intends to buy and sell on his own account he will need sufficient capital, therefore, to maintain a line of credit with his bank so that inquiries directed to his bank by foreign sellers may meet with a satisfactory response. Many persons entering the import business do not realize the importance of this. They seem to believe that, inasmuch as they are buying with documents to be delivered against payment, their financial condition is not important to the seller. However, in any form of financing except the irrevocable letter of credit, the foreign seller incurs some risk, either financial or moral. The financial statement is one way of gaging the financial risk. From it, the foreign seller, asked to deliver to him goods against payment or acceptance, can gain some knowledge of his ability to meet his obligations. Such statements represent at best, however, only the buyer's position at a given time and this, of course, can change overnight. The buyer's paying record is more important.

CAPITAL REQUIREMENTS IN IMPORTING Even where an importer is acting as a mere selling agent, he must have a fair amount of operating capital. He cannot operate success

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fully without traveling, cabling, or paying some one else to make his contacts for him. Especially in the case of new ventures, office expenses, salaries, and living expenses of the principals must often be met over a long period before commissions are collected. It requires more than a few ideas and a few contacts to make an import business successful, no matter how modestly it may be conducted at the beginning. Where the importer is buying and selling on his own account a much greater capital structure is necessary. Payments from dealers may lag, while drafts have to be met promptly. Losses due to fluctuating prices, unstable exchange, or refused goods have to be absorbed. Claims due to inferior quality of merchandise have to be settled. All of these are a drain upon capital, and, unless the capital structure is adequate to withstand these onslaughts the importing venture will be short-lived.

MORAL POSITION OF THE IMPORTER The importer, whether he acts as agent or principal, assumes respon: ity on two scores in every transaction. First, he guarantees goods of a certain quality at a certain price to be delivered at a certain time to his customer, the retailer or wholesaler. Secondly, he promises to see that the foreign seller is reimbursed for the value of those goods under the terms of his sales contract. In each

case, his moral responsibility is involved. He is daily confronted with the test of his good faith in his willingness to meet his just obligations.

REPUTATION AND RECORD

Naturally, one of the strongest recommendations an importer can have is his reputation for performing his obligations. His record over a period of years in this respect will be found invaluable. By the same token, a person newly entering the import business has no such reputation, but must build one. This is one reason why it is much harder to become established in the import business than it is to enter many other fields of activity.

Credit files on American importers are maintained abroad by exporters, just as they are in this country on foreign importers. American importers who get a bad reputation for not meeting their obligations sooner or later find it more and more difficult to carry on business and especially to open new accounts. Not only is this true, but in certain more remote places their actions tend to embarrass all American importers who may seek business there at any future time. Scrupulous observance of obligations in respect to meeting drafts constitutes a record which is essential to any importer seeking credit abroad.

SAFEGUARDING THE SALES TRANSACTION The importer makes his living by selling or distributing the goods he imports to wholesale or retail outlets in the United States. If he is trading on his own account, he is held directly responsible for the quality and delivery of the goods. If he acts as an agent, future orders will depend upon the performance of his principal, the foreign exporter. On the other hand, he is often asked to extend credit to his customers in this country or place goods on consignment with them. He must then decide upon the individual risk involved.

SOURCES OF DOMESTIC CREDIT INFORMATION

The importer has at his disposal the reports of established mercantile credit agencies, the credit departments of his customers' banks, and the commercial references which they furnish with their applications for credit. His operations are in all respects similar to the operations of a domestic sales organization. The Government does not furnish importers the same information on American firms as is furnished to exporters on foreign firms. There are many obvious reasons why this cannot be done, but the most potent is the fact that no organization that is essentially political in character can stand in judgment over the individual taxpayers that support it and take decisions or circulate information that may affect their livelihood. The Commercial Intelligence Division does, however, undertake to obtain Sales Information Reports on foreign exporters where the importer desires it.

CLAIMS AGAINST FOREIGN EXPORTERS

Where importers file claims against foreign exporters either for failure to ship goods (e. g., when the price rises) or because the goods shipped are not up to quality specifications, they must either rely upon the satisfaction of such claims in the foreign courts or resort to arbitration. In many lines of staple commodities such claims are constantly being arbitrated. The procedure in a voluntary arbitration is to ask the foreign exporter to name one arbitrator, whereupon the importer names one and the two choose a neutral third party. The decision must be unanimous. The decisions are based on questions of fact, not law. If the importer can show that goods were ordered in accordance with certain specifications or samples, and that goods of another quality were shipped and paid for, the claim will usually be allowed. Surveyors can often be employed to give expert judgment on questions of comparative quality. Člaims arising out of short shipment or damage not covered by insurance must be definitely established as the fault of the foreign exporter, and not of the steamship company or the work of pilferers. Such claims can also be arbitrated where questions of fact are involved.

COLLECTION OF CLAIMS

Collection of claims, once allowed, is often most difficult to consummate. The foreign exporter generally has no property within the jurisdiction of the State or against which the importer can obtain a judgment even where an arbitration judgment, voluntarily or involuntarily entered into, becomes a fixed obligation against the foreign exporter under the State law. However, many foreign exporters pay claims so arbitrated, and often without arbitration, if proper evidence is submitted. They do so in order to maintain the good will of their United States customers.

CLAIMS AGAINST IMPORTERS

Importers often incur claims against themselves through failure to pay or accept drafts; by canceling letters of credit before shipment but after foreign exporters have purchased or obligated themselves

for the goods; by refusing to accept goods because of late delivery, change în price, or rate of exchange, or because they are not up to specified quality. Under such circumstances foreign firms may sue in the United States courts and, having obtained judgments, proceed to collect by seizing tangible assets. Where an importer is merely acting as an agent, however, and that relationship is clearly defined, the foreign exporter must obtain satisfaction from the party who actually bought the goods.

GENERAL RISK IN IMPORTING

Importing in general, however, carries fewer risks than exporting. In almost every case where risk is involved, precautions may be taken by the importer that will either prevent or greatly mitigate loss. As the buyer, he may dictate how he will pay for the goods, and under what conditions he will fulfill the obligations as to payment he undertakes. The widespread use of the letter of credit in importing and of inspection certificates is ample evidence of the precautions taken. In extending credit, the importer has all the advantages of dealing with customers whose tangible assets are often visible, who operate under the jurisdiction of his own laws, and on whom credit information is readily obtainable. The credit losses in importing are, therefore, less than they are in exporting.

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