Important note: what I wrote below is relevant primarily for sea shipments. For air shipping, the remainder (usually 70% is paid before the goods leave the factory).
First, how does this mode of payment work?
A 30% down payment is wired (by telegraphic transfer) before components are purchased and production is launched. This step usually follows the final approval of prototypes by the importer (the purchase order can be given before this point).
The remaining 70% is wired after shipment. Technically, the supplier faxes the bill of lading to the buyer to prove the shipment.
- This mode of payment is very inexpensive (in bank fees), for both parties.
- In general it is the type of payment that suppliers prefer.
- Very few buyers cancel their orders and lose the 30% cash advance—unless a disaster takes place.
What should an importer do before wiring the deposit? What are the main risks to avoid?
# Risk No. 1: the supplier might not be honest; he might disappear with the cash. Unfortunately, scams happen in China. The buyer should make sure his supplier is in for the long haul. If he’s sure that other customers are happy and keep paying good prices, he’s probably fine. But how to make sure of this?? In most cases, the best solution is a background check.
# Risk No. 2: the factory cannot show you a prototype of what you want, before production starts. This is clearly a red flag. For simple consumer products, they should have samples on hand and should be able to send something to you within 10 days.
# Risk No. 3: the factory might not be able to produce up to your quality standard. Don’t forget, the 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.
# Risk No. 4: you issue a purchase order, you approve samples, you wire your deposit, but you have not signed a contract with your supplier. For large orders (or for orders that you can’t cancel with your own customer), you are strongly advised to let a specialized law firm craft an OEM contract. It lowers risks, and gives more leverage if things go wrong. Do you think contracts are useless in China? Maybe you should read this: Enforcing Contracts in China on the China Law blog.
# Other important elements: don’t wire the money on a personal account, and don’t wire the money 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 an importer do before wiring the reminder? What are the main risks to avoid?
# Risk No. 1: The products coming out of the lines are not conform, or they can’t be sold because of too many defects.
What you want to do is spot it as soon as possible. You need to send QC inspector(s) in the factory. If the first finished goods appear towards the end of production, an in-process inspection (at the beginning of production) can be the right solution. But if finished goods can be checked earlier in the cycle, this is when you should send an inspector. Finding quality issues at this point will give you some time to find a solution.
# Risk No. 2: The factory does not pay enough attention to packaging or to the way to load the container.
A pre-shipment inspection, which can be combined with a loading supervision (i.e. an inspector might be able to stay in the factory and check the loading of the container), is the appropriate solution.
# Risk No. 3: The factory sends cartons full of something you didn’t order.
Fortunately, it seldom happens. But what to do to avoid this risk? Here again, a loading supervision should catch this trick. Make sure the inspector opens a few cartons and take photos of the products.
As you can see, most of the “actions” should take place upstream — actually before even a deposit is wired. 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).