By Mark Dodd, head of international for Lloyds TSB Commercial

Any small to medium sized enterprise (SME) attracted to importing either finished goods or raw materials needs to do some serious financial thinking and perhaps talk to their bank first.

Using overseas suppliers might be a great way of obtaining keener prices, enabling increased production and ramping up growth — particularly where the materials you need can’t be sourced in the UK — but, it can also expose your business to additional supply risks and seriously stretch cash flow.

Where do I start?

The three factors you really have to consider are the price you pay, delivery times and quality of product.

What is included in the price quoted? — does it cover transport to UK or transit insurance? And what about import duty and VAT?

How long will the goods take to arrive?

When they do arrive, how can I be sure they will be of the agreed quality?

All businesses are exposed to some degree of risk. Just don’t over expose your operation when you alter your supply chain to include importing.

How do I protect cash flow?

Ideally you won’t experience problems — not everyone does — but the best way to protect cash flow is to know the triggers, and safeguard against them, before any become a problem.

Typically, as your company’s supply chain expands, particularly if you begin importing from places such as China, available working capital gets stretched, often in direct proportion to the time it takes for the goods to reach the UK. This is because most overseas suppliers want to be paid before the goods are dispatched. So you have to ensure that you know exactly when you will have to pay; what the cost covers; when the goods will arrive; and how quickly they can be turned into cash. This will determine how much additional working capital you will need to fund this source of supply.

It may be that you need to use import finance, where a bank will provide short term lending against the value of goods for which you have a buyer, until you are in a position to deliver the goods.

Due diligence

It pays to do your homework regarding your supply chain.

This might be difficult because the people most likely to have an opinion on the best overseas suppliers could well be your competitors. If you can, find someone prepared to give you an honest appraisal of the business you are planning to work with.

Even though it seems like a huge cost and time commitment, one of the best things you can do is to get on a plane and go out and see the supplier you're planning to use. Take a look around the factory, have a look at any testimonials that they may have and get to know the individuals involved. Once you have done this and have established a face to face relationship, you may even be able to negotiate better terms, such as 50 per cent of the price up front and 50 per cent on delivery.

Clearly you need to be sure that the goods you receive are of the correct quality. You therefore need reliable suppliers. Reputations take a long time to build and can be quickly destroyed by goods supplied which are not up to standard. Errors cannot be quickly rectified when your delivery time is four to six weeks.

Clothing is a great example — you order goods based on a sample, as fashion has to be delivered in time for the season and you need to be sure both the raw material and the manufacturing will be up to standard. If when the goods arrive they do not match the sample, you will have lost the seasons sales.

What other factors could cause issues?

Currency fluctuations, political instability and bad weather - such as the ash cloud which disrupted air travel for weeks in 2010 — are all potential problems.

As a result you could find yourself you paying more for goods or raw materials, or waiting longer for them to be delivered. This could mean you lose orders because you are unable to deliver to buyers. So, it is vital that you factor these issues into your wider importing plan.

Spread the risk

Once you have identified the risks, you should look at how you might reduce them.

Nothing kills cash flow like a warehouse of unsold products. If you have used up all your cash on importing a product that isn’t right, you’ve little chance of sorting it out.

It is only by selling products that you will restore your business’ cash balances, so always try to make sure you have more than one potential buyer and if possible, a different overseas supplier to spread the risk that one might not deliver to your satisfaction.

Your bank can also be a useful source of help and advice. If you are looking for financial support, remember that you will need to demonstrate a proven track record of selling similar products in the UK and that you have a buyer for the goods. .

At Lloyds TSB Commercial, we have international managers across the country who specialise in helping businesses involved in the import market. They are on-hand to guide management teams on those all important initial steps and beyond. They can help provide the increased working capital needed to bridge the gap between paying suppliers and receiving the money from buyers. They can also suggest ways to mitigate other supply chain risks using appropriate trade finance instruments, together with third party insurance and inspection providers.