Wednesday, January 12, 2005

International Finance and Payments

China is unique in that many small/mid-sized vendors have very little in-house knowledge of international banking or finance, and work solely through another China-side trade partner to accept international payments and deal with the bureacratic mechanisms of export. Partly because of this, unless your order is very large your supplier is going to want you to make full payment by the time the goods leave their factory and reach port. There is also typically a deposit when an order is placed in the 20-40% range. This is often sensitive to the price of raw materials and the resale/liquidation value of the final goods. For instance, if you are ordering steel I-beams or computer parts, there may be no deposit if they are a stock item. However, if you are ordering custom injection molded teflon parts the deposit may be equal to the price of the raw materials plus 10%.

There is not usually a major problem with the issue of the deposit. The problems come with making the rest of the payment. Most factories in China strongly prefer full payment ex-works, meaning they want payment in full as soon as the product leaves their factory. The issue of payment for orders from China is not terribly complex, but is often a source of great contention between buyers and sellers.

If your order is large or if you are dealing with a large company, you can probably negotiate payment via a Letter of Credit, or "LC". You will also see this instrument referred to as an L/C, or as "Documentary Credit".

Our friends at have a good detailed explanation here, but I would like to provide an overview for those of you that are too lazy to click on a link. :) When opening a Letter of Credit, you the buyer instruct your bank to freeze money that you have in your account and hold it until a condition is met which allows them to release the money to a 3rd party. The mechanics of the transfer are too detailed for this article - you should work with your banker if you are thinking about using an LC. There are many different kinds of LC, and the largest differences between them relate to the time window during which they are active, and the trigger condition that causes the release. For example, a "Sight LC" will trigger as soon as you take physical possession of the goods. An "Irrevocable LC" is valid until the product arrives, no matter how long it takes (even a year!). Be very careful when working with LCs. Also, note that the use of an LC does NOT intrinsically provide any guarantee of quality. To ensure quality, it is critical that you have a trusted and capable entity perform preshipment inspection at the factory.

No comments: