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Why this supplier won’t accept a letter of credit?

by Mike Bellamy 

My supplier in China insists on having payments for ordered goods as follows: 10% T/T + 90% L/C while my home bank asked me to insist on paying for ordered goods by 100% L/C. My Chinese suppliers turned down payments by 100% L/C and I cancelled the order. Why do you think my Chinese suppliers rejected payments by 100% Letter of Credit. Why were they in desperate need of the 10% T/T. Thanks

I have faced similar situations with suppliers and here is my best guess on what is going on behind the scenes:

If it is the first order, the supplier may not yet have a handle on the expected lead time. If their production delays cause the shipment to miss the target dates specified in the L/C, the buy side has the right to refuse payment and cancel the order.  By getting 10% upfront, the supplier has some leverage.

 Cash flow issues.

 While the following is unlikely if this is a legit supplier, it is possible they are planning to get a deposit and disappear.  This happens when a supplier is on the brink of closing up shop anyway, and they do all they can to get some money in their pockets before they close the door on the shop and run away.  For that very reason, if feel due diligence is essential on large orders.  Luckily due diligence is not expensive. Here is an article I wrote on the process.

BTW, did they give any explanation why they were so stuck on getting 10% upfront? If yes, pass that on to me as it may help me understand the specific situation a bit better.

If you need support finding a supplier here are four options.

Let me know how things work out for you.

Glad to help.


Question answered by Mike Bellamy, an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. Mike is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.

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