Trade Risk: Payments

Related entries: General, Risk & Law, Trading

There is increasing talk of trade-related scams (see here) and other problems coming out of China, especially from the central provinces. They generally hit smaller companies, and those new to the China market, but nobody is immune (we are working on one case involving pre-payment of several million dollars by an experienced, multi-national trading company, and in another case we recently completed due diligence for a UK SME who suspected foul play in relation to a large potential order).

Here, in the first of a series on trade risk, our expert on these issues Kurt De Haan, looks at some of the issues.

Payment Risk Increasing
In years past, the Letter of Credit (L/C) was an often used payment method, widely accepted by China suppliers. Later, importers and exporters alike sought to bypass the L/C’s extra paperwork and banking fees with a reasonable down-payment in advance by bank wire transfer (T/T) and with “balance” of payment by T/T after buyer’s receipt of seller’s faxed Bill of Lading (B/L).

Since the B/L usually demonstrates that the goods have been shipped, the buyer was willing to T/T the remaining payment upon its faxed receipt. And the supplier knowing that the buyer could not clear customs without the “original” B/L documents, was willing to ship the goods without balance of payment.

In most cases this process worked well. But China suppliers are now much bolder. In many cases you can now see total rejection of L/C payment terms and increasingly more requests for 50% payment in advance by T/T and 50% balance of payment prior to shipment. This means BIG risk for you in several respects.

First is that an unethical supplier could abscond with all payments and not ship the goods. More commonly is that the supplier may use your funds to pay their other business debts (commonly known as “robbing Peter to pay Paul”).

But most commonly is that the supplier, which already has most or all of your payment, will be much less willing to remedy any significant quality problems discovered during a pre-shipment inspection. After all, they not only still have the goods, but they already have most or all of your payment too! This means they are in control and you are in the weakest possible position.

So what do you do? Well, if it is an unfamiliar supplier and the value of the transaction is significant, you may want to consider using an L/C – and ideally 100% payment by L/C, which means no down payment to the supplier and the strongest possible position for you.

If the supplier does not accept that, then you can consider offering a reasonable down payment (10-35%) in advance by T/T with balance of payment by L/C. But in no case should you make more than a 35% down payment and in no case should you make the entire payment prior to shipping.

Balance of payment should be either by L/C, or only after receipt of the faxed B/L (first confirm B/L’s authenticity with the shipping company before remitting final payment).

And don’t forget to make an “Inspection Approval Certificate” a requirement of the L/C so the supplier cannot ship the goods prior to an inspection and so the goods shipped are in full compliance.

China Business Services offers a range of risk management, due diligence and inspection services in China. Please contact us to discuss your requirements, or visit the Our Services section of the website for more details.

One Response to “Trade Risk: Payments”

  1. Archive » Due Diligence = Sound Sleep| China Business Blog Says:

    […] s also put suppliers on notice that they are being monitored. In combination with sensible payment terms they provide an excellent, low-cost risk management tool. • Personal Due dilige […]

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