What is Dropshipping: Your Guide

Dropshipping is an order fulfilment method commonly used by online retailers.

It can make it much easier to setup an ecommerce business, without needing to rent a warehouse and spend a small fortune on stock. It’s all about making use of third-party manufacturers and wholesalers to fill customer orders as they come in.

In this guide, we’ll look at dropshipping in a little more detail. You’ll learn what it is and how it all works, as well as how to get your online retail business set up with its first dropshipping supplier. We’ll also explore the tax and legal implications of using dropshipping.

And if you need a reliable, cost-effective way to pay dropshipping companies and other suppliers – open a Wise Business account. It’s free and offers low fees to send money all over the world, and you’ll always get the fairest exchange rate.

But first – it’s time for dropshipping 101.

What is dropshipping?

Dropshipping is where an online retailer will use a third party like a wholesaler or manufacturer to fulfil its customer orders.

So, if you’re the retailer, you’ll sell products to your customers on your ecommerce website. When an order comes in, you’ll send it to your dropshipping supplier to fulfil. The supplier packs up the order from the stock in its warehouse, and sends it directly to the customer.

If you haven’t spotted it already, there’s a major advantage to setting up your online retail business in this way. You don’t need to invest lots of cash upfront in making or storing a large inventory of products. There’s no need to rent a warehouse or take on the risk of holding stock yourself.

Instead, you buy your stock from the dropshipping supplier, who handles storage, risk and insurance, and of course shipping.

Here’s an example of the steps you’d take to get set up with a dropshipping supplier:¹

1. Search for a supplier which stocks the products you’d like to sell on your ecommerce website. You can approach individual wholesalers directly, or use a directory such as Worldwide Brands, Oberlo, SaleHoo or Doba to name just a few examples. You may end up using more than one dropshipping supplier to expand your product range. You’ll need to find reliable suppliers offering competitive rates, and choose products that are in-demand with customers and that you can make a profit on.
2. Set up your ecommerce site, or list products for sale on a marketplace such as Amazon
3. Price your products competitively, remembering to factor in dropshipping supplier costs so that you still have decent profit margins.
4. Start selling!

The most important part of the process is choosing which suppliers to work with. You need a company that is trustworthy, reliable and a good, prompt communicator.

Remember that if something goes wrong with shipping or products are defective, you’ll have to deal with the customer service side of things – even if it’s not your fault.

Check out the supplier’s track record, along with their complaints process, refunds policy and crucially, shipping times.

Dropshipping and the law

We’ve looked at how to get set up with dropshipping and find suppliers, but now we come to the legal stuff. This is just as important as the steps above, as you need to make sure your business complies with Australian consumer law.

Here’s what you need to know²:

• Dropshipping is legal in Australia.
• However, you can only sell products that are approved for legal sale in Australia – you may need a permit or licence for certain types of products³.
• You need to check that you comply with the Competition and Consumer Act as well as the Australian Consumer Law.
• You’re legally required to have an Australian Business Number (ABN)⁴ if you want to run an online retail business – you can apply for this quickly and easily online.

To make sure you’re not caught out by legal issues, it could be a smart idea to hire a lawyer at the outset. Having a trained legal eye look over everything and handle any relevant paperwork could help you to swerve problems later on.

Tax implications of dropshipping⁵

If you’ll be selling products online, whether or not you use dropshipping, you’ll need to pay income tax on your earnings. These will need to be declared to the Australian Tax Office (ATO).

There’s also Goods and Services Tax (GST) to consider. If you make more than $75,000 a year from your business, you’ll need to register for GST.

Additionally, you may have to comply with relatively new rules on low value goods and GST from the ATO. If you dropship imported goods to customers in Australia and these goods are valued at $1,000 or less, you may need to charge GST.

Want to find out more? Head to the ATO website, or ask a registered tax agent for some advice on your obligations and the best way to set things up.

So, that’s you well on your way to finding great dropshipping partners to work with and ticking all the legal and tax boxes along the way. You’re nearly ready to start selling your first products.

Just before you do, make sure you also have a cost-effective way to pay dropshipping and other supplier invoices. Your suppliers are likely to be based in many different locations worldwide, so you need a low-cost way to send money internationally.

Introducing Wise. Open up a dedicated Wise Business account and you can do business without borders. Send, spend and receive money with the real exchange rate, along with low fees that not only beat banks but are also up to 19x cheaper than using PayPal⁶.

Your dropshipping suppliers don’t need a Wise account to get paid either. All they need is a bank account to receive fast, secure payments no matter where in the world they’re based.

And that’s dropshipping in a nutshell.

You should now be armed with all the info you need to get out there and find dropshipping suppliers, helping you get your ecommerce business off the ground without needing to purchase a warehouse full of stock.

Just remember to get the legal and tax stuff sorted before you start selling!

Sources used:

Sources checked on 5-October 2020.