THE CHINA QUESTION

How can I use letters of with Chinese suppliers?

I am a buyer and realise that most transactions with China suppliers are done through transfers, but I would like to know how to use letters of credit, as I have heard they can better protect me

The specialist perspective

payment by presents If there is any discrepancy between you feel the supplier really wants your A three major advantages. First, no the documents received from the supplier order. deposit is required before production. Full and the letter of credit’s requirements, the payment happens only after shipment and buyer has two options: I can see two reasons why most under certain conditions. It is an excellent Chinese suppliers refuse letters of credit. way of reducing risks for large orders. 1. Waive all discrepancies, release First, this payment mode protects the Second, the buyer requires a list of payment and get the documents buyer more than the supplier. In theory, documents. If the supplier does not send (sometimes a discount is negotiated the opening bank guarantees to pay and the right documents in the right number and the supplier issues a credit note) the letter of credit protects the supplier and by a certain date, it causes a discrep- 2. Refuse the discrepancies and cancel against payment risks. In reality though, ancy and suspends payment. It pushes the letter of credit. For the most there are virtually always discrepancies. In the supplier to pay a lot of attention to common letters of credit, known as case the buyer’s account is empty, it might documentation, so that the buyer can get at sight, it means the buyer does not push the bank to manufacture discrepan- the goods out of Customs smoothly. receive the documents cies in order to give the buyer an easy way Third, a letter of credit can reduce the out. At the very least, the discrepancies buyer’s risks regarding product quality A minority of Chinese suppliers allow for a payment delay. and shipment delays. If the quality accepts letters of credit, so here is my As a consequence, the supplier prefers is acceptable, an inspection agency advice. From the very first communica- the solution of bank wires. This way the nominated by the buyer will issue a tion with a potential supplier, mention supplier hooks the buyer with a 30% certificate, which should be one of the your payment terms. If they push back, down payment and can avoid payment required documents. The shipment date tell them it is your company policy. If they delays by refusing to ship the products should then take place within the letter of still refuse, look for another supplier. before receiving the remaining 70%. credit’s validity period. If you feel that a supplier might accept Second, most Chinese manufacturers a payment by letter of credit, here are my have little on hand. They need money tips to reassure them: to buy the components necessary for pro- From the very first duction and they cannot always count on communication with a n Use a famous international bank if their bank to discount a letter of credit. possible; This is why a supplier accepting a potential supplier, mention n Only ask for the necessary require- payment by letter of credit is a good sign. your payment terms. If they ments (your bank’s commercial It means they have no financial problem push back, tell them it is department should be able to help you and are relatively stable. on this); your company policy. If they n Send a draft to your supplier before still refuse, look for another formally opening the LC and take supplier their comments into account; and n Open a letter of credit at sight. Do Renaud Anjoran not try to extend the maturity, unless Sofeast, Shenzhen

58 << January/February 2013 www.chinalawandpractice.com