There are a number of things to consider and also some useful resources you can use for any further research you might like to do.
Questions to consider
- Do you trust your supplier?
- As they are based in China, consider the consequences of the goods not being sent as agreed. Do you have a contingency plan? Can you take out insurance against this risk?
- Are you having the goods quality checked before payment/shipment by a third party to ensure they are of same quality of samples you may have seen? Companies that provide this service include SGS, intertek and Bureau Veritas
- Have you completed a credit check on your supplier?
- Although you are buying from them, you have paid for the goods upfront meaning they are holding your money. You could ask your bank to send out a status enquiry via SWIFT (bank reference request to your supplier’s bankers, or obtain a Dun and Bradstreet report.
- Why does the supplier need the cash in advance – is it because they want security of payment or do they need the cash to manufacture/source the goods?
- Can you negotiate another payment term, even if it means using the cash as security for a credit line with your bank? i.e. Letter of Credits or even better Collection/ Bill of Exchange as this does not require a credit line.
Useful resources
- Look on the HKTDC ( Hong Kong Trade Development Council) website. As well as advice on doing business in China, they have a database of suppliers from Hong Kong, the Chinese mainland and Taiwan. If buying from China for the first time, you may want to go through a HK based company as they will have more experience in dealing with UK customers. Link: http://www.hktdc.com/info/ms/
uk/United-Kingdom.htm - Contact China – contact details can be found at the Britain Business Council link:http://www.cbbc.org/. They will also assist if you are looking to visit China.
- A letter of credit is a written undertaking given by a bank on behalf of the buyer to pay the seller an amount of money within a specified time, provided the seller presents documents which comply with the terms laid down in the letter of credit. This will be irrespective of the buyer’s financial position at the time a claim is made. As your bank is underwriting the credit risk, they will need to provide you with a credit line and you may be required to provide collateral. For smaller businesses, this is normally in the form of cash cover. It is worth bearing in mind however that your supplier can only claim if they comply with all the conditions contained in the letter of credit, including shipment. As the bank guarantees payment via the letter of credit, you may also be able to negotiate more favourable payment terms from your supplier. Remember your bank will only check documents not goods, so ensure the documents you request give you protection regarding quality etc.
- Most importantly, speak to your bank as early as possible when looking to buy (or sell) overseas for guidance and advice. Your bank should be able to advise on the best solution given your business and the circumstances of the transaction and there should not be any fees for this.