by Renaud Anjoran in 'Quality Inspection Blog'
Yesterday I responded to a question on LinkedIn, and I thought it would be interesting for other readers.
Here was the (quite common) question:
What are some cheaper alternatives to L/C for international trade?
If you want to do business outside of the United States with countries/merchants that do not take credit cards and want also avoid expensive L/C fees while providing both protections against quality of merchandise and fraud, what are the alternatives?
Here was my “20 seconds to read” response:
The most common payment method is a bank wire. It usually works this way:
- You make sure you work with serious people: ask for customer reference, run background checks, and/or perform factory audits.
- You develop samples until you are confident the suppliers knows exactly what you want.
- You wire a 30% deposit before production starts.
- You pay a quality assurance firm to inspect product quality.
- You wire the remaining 70% before shipment.
- The supplier ships the goods and sends you the documents by express courier.
Then Etienne Charlier, from Procur’Asia, wrote this complement to my response:
Adding on Renaud’s information, a possible alternative to L/C is what I call the L/C of the poor:
1. You pay first the down payment that you can negotiate (from 0% to 30%). 30% should be the maximum.
2. Once the supplier confirm the goods are ready, you ask your inspector to check the goods. If everything is OK, you release the goods (allow the goods to be sent to the ship
3. Once the goods are on board of the ship, the supplier gets the Bill or Lading (B/L)
4. You ask the supplier to send you a copy of the B/L
5. If everything is OK on the bill of lading (it is important to check this thoroughly), then you pay the final payment to the supplier
6. Once the supplier receives the payment, they send you the original B/L
This is not fool proof, but the incentives are properly placed:
- if you do not pay the supplier knows you will never get the goods, so there is not much incentives for you not pay
- if the supplier gets the money but does not send you the original B/L, they still do not get any advantage since the goods are sent out, so there is no reason to do that.
However, this is not foolproof. The L/C is the only way to really get some security.
So, it is up to you to evaluate whether the cost related to the risk of losing one shipment you paid for is lower than the cost of a real L/C. The higher the value density of your product, the higher the risk is.
I very much agree with Etienne. I advise all importers to ask for this payment term, when they cannot afford the fees that come with a letter of credit (see Confirming quality when paying by bank wire).
But, unfortunately, small importers (such as the one who asked this question, I guess) often find it impossible to negotiate the final payment AFTER shipment. It is much easier when the supplier knows your company and really wants to work with you…
++++ Update ++++
For a more in-depth look into the risks of paying prior to shipment, read this excellent article on the China Law Blog.