7 tips for organising your processed fruit and vegetables export to Europe

1. Trust is important, but always make sure to secure your payment

Selecting the most suitable method of payment is a key factor of a successful export sale. Whichever payment method you select, you should always sign a contract of sale before performing any international transaction. Basically, all methods of payment can be classified as either ‘clean’ or ‘documentary’. In clean payments there is no payment security, except for in advance payment. In documentary payments, a level of security is achieved using the banking system and accompanying documents. The following methods of payment are used:

• Payment by cheque - this is the most insecure method of payment in international trade and you should avoid it. The main problem is that your bank can refuse to accept the check. Sometimes it is better to lose the sale than to make a sale while not receiving the payment for the goods. Also, when sending the cheque through the international banking system, fees can mount up significantly, making this method very expensive and slow.
• Payment by bank draft – a physical document that is rarely used, as it has been replaced by electronic bank transfer.
• Clean bank transfer – this is a well-known method. The importer pays you, using a banking system, commonly through SWIFT (Society for Worldwide Interbank Financial Telecommunication). It is a safe method only in the case of advance payment (when you get paid before shipping the goods).
• Clean collections – this involves sending financial documents such as bills of exchange or promissory notes through the banking system in order to collect payment from the importer. You should use this method only after establishing a certain level of trust with your buyer, because you can lose control over the goods before getting paid.
• Documentary collections – this method guarantees your physical control of the goods until you get paid. Documents (such as invoice, shipping documents, insurance and the like) are transferred through the banking system. Importers can access the documents only when they comply with the instructions you sent to the collecting bank (Documents against Payment or Documents against Acceptance). This method guarantees your physical control of the goods, but it does not guarantee that you will actually get paid in the end. In the event that the importer does not pay you, you can return or store the products, but this is obviously not an ideal situation.
• Letter of credit - Other than payment in advance, the Letter of Credit is considered the most secure method of payment for you. In this process, the buyers’ bank will only make the payment when the presentation of documents complies with the Letter of Credit conditions. For extra security, the seller can request the advising bank or another bank to confirm the Letter of Credit. In that case, the importer will get goods only after payment. This is also a good way of checking the financial standing of the buyer, as the issuing bank will do a credit adequacy test before opening the Letter of Credit on behalf of the buyer.

Generally, when making the first export shipments, you should first require advance payment and gradually move to the Letter of Credit and finally to the Standby Letter of Credit. A Standby Letter of Credit is opened in case of regular shipments for a whole year. It reduces the cost, because instead of twelve Letters of Credit during the year, you only need to open one Standby Letter of Credit that covers the average volume over the year. This can also be a good solution for deferred payment.

However, this process is related to long-term partnerships and for payments of individual shipments one by one. If you do not know your buyer, you should always insist either on advance payment (to be paid before sending the goods) or a Letter of Credit.

The main disadvantage of a Letter of Credit is that it can be costly. To overcome this problem, you can offer the buyer to split the fees. For example, you can pay the fees of your bank while the importer can pay the fees of his (issuing) bank. Another problem faced by some developing countries is when their banking sector does not offer the possibility of using the ‘Letter of Credit’. This process requires correspondent banks, which some developing countries do not yet have.

When trading with the European buyers, you may be faced with pressure from the importers to use deferred payment. You can accept this condition if you use export insurance services. However, in order to protect suppliers from this common practice, the European Commission has adopted a new directive to protect small and medium-sized suppliers in the food supply chain. The directive aims to protect farmers, processors, distributors, producer organisations and suppliers from outside the European Union.

2. Do not take risks - insure your export and increase competitiveness

Export involves a lot of different risks such as payment, risk of damage and thefts, currency fluctuations and political risks (such as a ban on the import of specific products). It is therefore recommended to insure the payment and goods, especially if the contract involves larger volumes and values. 

For the export of spices and herbs, export credit insurance is among the most common insurances. One particular advantage of export credit insurance is that it not only secures your export, but also increases your competitiveness. As many European buyers ask for deferred payment, you can ensure payment with export insurance services. Export credit insurance will allow you to offer deferred payment, which can greatly increase your competitiveness.

Export credit agencies (ECA) are responsible for the insurance. Many of them have an international network of privately owned offices. Export credit agencies can be also governmentally owned. Some export credit agencies are established by governments to increase the competitiveness of exports from their country. You should search for one in your country.

If you want to offer deferred payment to potential buyers, you can ask selected ECA for support. This is usually done in the following way:

• You submit the request for credit insurance with the necessary documents to ECA.
• ECA sends an indicative offer to you.
• If you agree with the indicative offer, ECA orders credit reports for all buyers that you would like to offer deferred payment terms.
• ECA analyses the buyers’ creditworthiness and sets the credit limits.
• ECA delivers the final offer to you, after which, if you accept, the insurance policy is signed.

The added value of this procedure is that you also learn a lot about your buyers and gain insight into their solvency and creditworthiness. For spices and herbs, due to the seasonal nature of the goods, a short-term insurance (repayment period of up to one year) is recommended.

The ECA will give details of risks covered by the policy, which is normally related to the event of non-payment by the buyer. The important thing to note is that they will not pay out under disputes between buyer and seller until the dispute is settled in the seller’s favour. Trade credit insurance only provides protection for bankruptcy of the obligor. Also, becoming insolvent can be very different than ‘failure to pay’.

Aside from insuring the payment, you should also insure your products. A shipment insurance is used to protect your shipment of products throughout the entire journey from you to your customer. The risks that are covered typically include, for example, theft, damage due to heavy weather and damage due to problems with a vessel. You and the importer will have to agree on who is responsible for the insurance. This is specified in Incoterms (required technically only under CIP/CIF terms). You are advised to agree this type of insurance with your buyer. In this type of insurance, two types of documents are used: Insurance Policy and a Certificate of Insurance.

Other types of insurances provided by ECA include the issue of guarantees (for companies willing to apply to international tenders), short-term financing or factoring.

3. Include customs procedures in your cost and time calculation

Importers, agents or customs brokers are responsible for taking the spices and herbs through European customs. Although you, as the exporter, are not usually directly involved in this process, it is extremely important to be in touch with the transporter and importer and provide all necessary documents and further support. Full customs clearance will only be the exporter’s responsibility if exporters use ‘Delivery Duty Paid’ (DDP). It is not generally recommended to use DDP.

Generally, the customs procedures follow these three steps:

• Customs pre-alert: spices and herbs entering the European Union must be ‘pre-alerted’. This pre-alert is an electronically submitted alert, normally sent by the carrier or freight forwarder carrying the goods, usually between 2 to 24 hours before the arrival of the goods.
• Inspection and control: this step involves a documentation check and the physical examination of the goods.
• Customs decides on further actions: accept the goods for free trade within the European Union, allow movement into the free zone, allow re-export outside the European Union, destroy the goods or refuse the goods.

When spices and herbs arrive in the European Union, they are inspected and checked by customs authorities. Apart from examining the export documents, examination can involve taking samples for analysis in a customs laboratory. In case of non-compliance with the European Union food safety rules, the product can be rejected, and in some cases, customs authorities may require the physical destruction of the goods.

Rejection of the goods may mean a great profit loss for the developing country exporter. It is therefore extremely important to properly check your spices and herbs, including laboratory testing, before the export. To find more about specific tests or requirements that are relevant for spices and herbs read our study about buyer requirements.

Another important aspect related to customs is the proof of the origin of goods. Most spices and herbs imported from developing countries are imported with lower customs duty or duty free, because this is guaranteed to developing countries within the European Union Generalised System of Preferences (GSP). In addition to GSP, the European Union has a number of specific free trade agreements with different developing countries.

In more than 90% of cases, spices and herbs imported from developing countries are duty free. For example, the 0% tariff is applied regardless of the origin for black pepper, ginger, turmeric, nutmeg, cinnamon, cardamoms and coriander seeds. There are only a few exceptions where some tariff rates (usually not high) are applied. Examples include dried chillies from China (ad valorem tariff of 5%), vanilla from Indonesia (2.1%), bay leaves and thyme from India (from 2.4% to 2.9%) and cloves from India and Indonesia (2.8%).