Clients are always asking our China lawyers what they can do to ensure they receive payment for their product or to ensure they receive good quality product for their payment. Buying product from China is probably the toughest transaction because hardly any Chinese companies accept much less than full payment.
Our China lawyers are often asked whether it is true that Chinese companies rarely/never accept less than 50 percent upfront. Yes, that is generally true.
A post on Laurel Delaney’s Global Small Business Blog, appropriately entitled, Age-Old Question of International Trade, deals with getting paid on an international transaction. The post first links over to a recent Wall Street Journal column by Kelly Spors, who gives the following advice for getting paid:
Banks generally offer several ways to reduce the financial risks of trade, but the payment procedure ultimately depends on how much trust the parties have developed, which company has more leverage and the types of goods ordered.
In the early stages of a relationship, parties may seek ways to share the risk. One common way is to get a so-called letter of credit. With this, the importer’s bank essentially guarantees it will pay the exporter the balance due if proper documents are sent from the exporter’s bank within a specified time. These might include an invoice, a packing slip and a third-party inspection certificate verifying the shipment’s contents. The importer probably won’t see the goods before payment, but it can at least be assured that the goods were verified.
The total fees for letters of credit, which are pretty evenly split between the importer and exporter, tend to run from 0.5% to 1.5% of the price of the goods, depending on the creditworthiness of the importer, says Dan Fisher, senior vice president of global transaction banking for HSBC Bank USA, a unit of HSBC Holdings PLC.
Another option is called documentary collections. The foreign exporter’s bank contacts a U.S. bank to act as a collecting agent on the exporter’s behalf. When the goods arrive in the U.S., the importer must go to the bank to pay for them. In some cases, the importer may be able to collect the goods before paying for them. Documentary collections generally cost both parties $75 to $150 each, Mr. Fisher says. The exporter assumes more risk with this option because the bank acts as just an intermediary and doesn’t guarantee a payment.
You don’t necessarily have to use a bank to set up a more-equitable payment plan, however. The importer might agree, for instance, to send 50% advance payment to the exporter and then 50% after the shipment arrives. In that case, both parties are taking on part of the risk.
Nice short answer.
Ms. Delaney then links over to a chapter from her book, Start and Run a Profitable Exporting Business that deals with Methods of Payment: Terms, Conditions, and Alternative Financing Sources for Export Sales, which does about as good a job as I have seen in explaining how to ensure payment when doing an international deal and the various complicated methods for doing so. This chapter is hugely valuable and, from now on, instead of giving tortured oral explanations of letters of credit, etc., I will e-mail this chapter to our clients seeking such answers.
What do you think? What are you seeing by way of China payment terms?