1- BANK WIRE (T/T)
This mode of payment usually follows by approval of samples from the importer. After then the purchase order can be given. Generally, a 30% down payment is wired (by telegraphic transfer) before components are purchased and production is launched. The remaining 70% is wired after shipment. Technically, the supplier faxes the bill of lading to the buyer to prove the shipment.
Advantages of payment with bank wire transfer method:
– This mode of payment is inexpensive (in bank fees), for both parties.
– This mode of payment generally preferred by the suppliers.
– Very few buyers cancel their orders and lose the 30% cash advance—unless a disaster takes place.
Before wiring the deposit an importer should take some precautions to avoid main risks:
1- Risk, Scams: The supplier might is dishonest and disappear after the advance payment. The importer should make sure to connect with a long term supplier. To avoid this risk is to have a background check.
2- Risk, Supplier can’t/don’t manufacture the product you ordered. The supplier can’t show you a prototype according to your specifications and to discover this takes almost one month (including finding a supplier and defining the product). For simple consumer products, they should have samples on hand and should be able to send something to you within 10 days. To avoid risk contact with a sourcing agent.
3- Risk, Quality Standards: The factory might not be able to produce according to your quality standards. Samples you approve during development are generally not made in the workshop under bulk production constraints! If you have serious doubts, send an auditor or one of your technicians in the factory and ask for his opinion. For certain types of products, you might want to ask for a pilot run (i.e. producing a short series first) and send an inspector to check these products.
4- Risk, Not contracting: Importer send purchase order, approved samples, wired deposit however not signed a contract with the supplier. To avoid; especially for large orders it’s stongly recommended to let a contract that specialized lawfirm craft. Do not forget a signature at the bottom of a paper worth more than a hundred words.
Note: Don’t wire on a personal account or to another company, except if you get a stamped certificate that the payee and your supplier can be considered as the same company.
What should be done before wiring the payment:
Quality Defects: The products coming out of the line should be conformed to avoid too many defects. The first step, the importer should spot it early. It can be done by sending and QC inspector to the factory. During production, inspection can be the right solution. To discover defects while they are in the cycle with the help of inspector, gives time to the importer to find the solution.
Packaging and Container Loading: Because of hurry orders or busy season, the factory does not pay enough attention to packaging or to the way to load the container. A Pre-Shipment Inspection of the packaged products with quality defects and Container Loading Supervision is the appropriate solution.
2- LETTER of CREDIT (L/C)
Letter of credit (L/C), or documentary credit, a bank is used as a third party to guarantee that a payment will be done if a number of conditions (such as the quantity of products shipped out, the shipment date, etc.) are met by the supplier. In practice, the importer (aka “applicant”) opens an L/C with his bank, who contacts the bank appointed by the exporter (aka “beneficiary”).
One of the advantage, the supplier can get a cash advance from his bank and use it for purchasing and producing. And he can be reasonably sure of getting paid if he complies with all the requirements. Generally, the L/C is opened only after prototypes have been approved by the buyer. In general, the factory waits for the notice of the L/C opening before purchasing the fabrics and accessories to use in bulk production.
There are types of L/Cs. We’ll focus on irrevocable L/Cs. The payment to the supplier can take place upon receipt and confirmation of the documents (aka “at sight”), or 30 days after shipment, or even 60 or 90 days after.
While paying with L/C an importer should take some precautions to avoid main risks:
Risk, not being precise enough in the description of the requirements.
The supplier will get paid whenever all the requirements completed in the list of L/C. The best practice is to well define product specifications during product development and list them in the L/C.
Risk, forgetting some elements in the L/C.
The L/C includes a list of documents that have to be given to the importer’s bank. They prove that the correct products were shipped out the right way, so they are used to trigger the payment. The importer also uses these documents to get the products out of customs.
For example, a common document required in L/Cs is a passed inspection report issued by a designated quality control company. It is an excellent way of letting the factory know, in advance, that an inspection will take place.
Note: The bank will not care whether you had a contract with your supplier. The payment obligation is only based on the L/C terms. A good contract gives you some leverage over your supplier.
Risk, requiring too many elements in the L/C.
There are factories that refuse L/Cs and stop everything because of “soft terms”. It is easy to set unreasonable requirements (e.g. a document issued by the importer himself). The buyer basically retains the right to cause a discrepancy, and this way to cancel the payment. Suppliers are not sure they will be paid even if they do a perfect job, and their bank wouldn’t give them a cash advance.
Best way to proceed: the importer sends a draft of the L/C terms to his supplier, who will point out the details that look incorrect or abusive.
Risk, bank deals with only documents, not with quality.
An exporter can ship what he wants if there is no product inspection, even under an L/C, and receive payment… Nothing replaces a presence in the factory during production, and quality control before shipment.
Summary;
Actions should take place upstream, before even a deposit is wired. The buyer has the power whenever she/he has money. You have to put a sound system in place while your supplier is likely to accept it (i.e. when he is waiting for payment).
If you can only pay for one QC inspection, have it done during production (except if the packaging stage is the most sensitive one). If issues are noticed, you can probably force your supplier to pay for a re-inspection, which can take place after all is repaired and packaged (if appropriate).