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Importing - Factory Payment Terms

State.Of.Flux

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Hi all,

Long time lurker, first time poster. Firstly, I'm really grateful for all the advice and information that I have read here.
There are some super successful entrepreneurs and a bunch of like minded people here that I've rarely encountered before. Kudos!

A little background about me. I've imported containers, mainly from China in the past of varying products and materials. There's been some speed bumps and pot holes but the learning experience has been phenomenal.

I've found a new factory that has slightly different payment terms that I haven't encountered before and I was hoping on some guidance to navigate this.

My usual suppliers payment terms are completed in 2 parts:

a) 30% deposit to commence manufacturing
b) 70% balance upon loading the container

The new factory that I have found wants:

a) 30% deposit to commence manufacturing
b) 50% payment once items are completed
c) 20% payment on the B/L

Without sounding naive to the supplier (China is the wild, wild west) how do I navigate this.

I'm happy with the payment terms as it staggers the payments out. How does this work?

I usually negotiate FOB pricing and then when the goods are ready, I compare the suppliers shipping fee with a couple of other shipping agents (China based). For some reason, going with the suppliers shipping option in the past has been cheaper as the agents tend to stack on a lot of other fees (container transport, local charges etc) even though I have advised them of the FOB arrangement with the supplier.

Thoughts and guidance are appreciated. Thanks in advance :)
 

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B_Mac

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I'm confused on how the new payment terms have anything to do with the shipping agent you go with. Are they related or were you just bringing it up.

Anyhow, on the new terms, it seems more complicated, unnecessarily so. I use a wire transfer, so with a 30/70 split, I'm paying two each time. I wouldn't want to add a third fee. Even if you aren't paying a fee, its more time spent paying a third time. What do you get for that? I personally wouldn't bother.
 

Walter Hay

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If you are shipping container loads the value probably warrants using a Letter of Credit.(L/C).

Your new supplier has not expressed terms correctly: c) 20% payment on the B/L . This should read 20% payment on delivery of Clean On Board Bill of Lading.

See these two answers in my AMA GOLD! Sharing my lifetime experience in export/import. Product sourcing specialist. regarding delivery of B/L via Telex.
Post #1,772 Post #1,786

You should also search that thread for Freight Scams. You will find that I strongly advise against using Chinese freight forwarders. Extra charges can just be the beginning.

Walter
 

AgainstAllOdds

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There's nothing complicated about your question. You're complicating it for no reason.

The factory is giving you an added benefit that you can choose to take or not to take.

Anyhow, on the new terms, it seems more complicated, unnecessarily so. I use a wire transfer, so with a 30/70 split, I'm paying two each time. I wouldn't want to add a third fee. Even if you aren't paying a fee, its more time spent paying a third time. What do you get for that? I personally wouldn't bother.
And ignore this advice completely.

When you start doing 5-6 figure orders, then the 20% will have a huge impact on your cashflow. Once you've hit the point where cashflow matters, $50 for an extra wire transfer is a no-brainer.

My purchases have several different terms:
  • 30% down; 70% against the Bill of Lading -- amazing terms
  • 30% down; 70% before shipping.
  • 10% down to produce; 90% when I'm ready to have the product ship.
  • 98-99% upfront for the 1-2% discount on the order if I trust the factory.
 

AgainstAllOdds

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If you are shipping container loads the value probably warrants using a Letter of Credit.(L/C).
Also, I advise against using Letters of Credit in the U.S. until at a massive scale where Letters of Credit are cheap.

I bank with Chase. Chase requires $50,000 in a separate account that's tied up until the product hits stateside. For the service, they charge $3,000 on $50,000. There's been one scenario where I was legally required to have a Letter of Credit. However, the cost of the L/C was way too high to warrant ever having one.

Maybe I'm missing something and haven't explored all the options available for this type of arrangement. However, I've never seen the point until at at 6-7 figure scale.

Have the factory ship, and then release payment in time for the Bill of Lading to be telex released 1-2 weeks before the shipment arrives.
 

biophase

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It looks like the second option actually wants payment sooner than the first one.

Most of my factories want 30% down and 70% upon completion when ready to ship.

I have some factories now than let me do 0% down and 100% payment after it’s shipped.
 

Walter Hay

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Also, I advise against using Letters of Credit in the U.S. until at a massive scale where Letters of Credit are cheap.

I bank with Chase. Chase requires $50,000 in a separate account that's tied up until the product hits stateside. For the service, they charge $3,000 on $50,000. There's been one scenario where I was legally required to have a Letter of Credit. However, the cost of the L/C was way too high to warrant ever having one.

Maybe I'm missing something and haven't explored all the options available for this type of arrangement. However, I've never seen the point until at at 6-7 figure scale.

Have the factory ship, and then release payment in time for the Bill of Lading to be telex released 1-2 weeks before the shipment arrives.
It is not uncommon for banks to require some form of guarantee to make sure they don't lose out if the buyer defaults, but for smaller value shipments that is not often a problem.

From what the OP wrote, it appeared that the total would not be huge, and I have seen many people use L/C s for shipments worth only $5,000 or $10,000. The biggest benefit for such small importers in using an L/C is quality control. The L/C terms should include product specifications and inspections. Fees that I have been apprised of lately on small L/Cs can be as low as 1% or as high as 3%.

I was concerned about the OP stepping outside his level of experience, and in particular his seemingly casual approach to the use of "shipping agents", particularly Chinese ones. He no doubt means freight forwarders, but this suggests he is flying by the seat of his pants.

I know it is common for Chinese freight forwarders to add excessive and unwarranted inland charges. Chinese and Russian freight scammers (and some others) generally add charges after they have taken possession of the shipment, and while the vessel is supposedly at sea.

In effect they hold the cargo to ransom. An L/C can help avoid that, and an importer should notify his bank as soon as big extra charges are notified while the cargo is at sea. That way the bank will be alerted to the likelihood of a fake B/L being presented.

Walter
 

Walter Hay

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It looks like the second option actually wants payment sooner than the first one.

Most of my factories want 30% down and 70% upon completion when ready to ship.

I have some factories now than let me do 0% down and 100% payment after it’s shipped.
It was good to read that you can buy at 0% down and 100% payment after the goods are shipped. I enjoyed such terms when importing, and my franchisees gained that same benefit that resulted from me building a great relationship with suppliers. I had carefully cultivated an image of trustworthiness and integrity.

Actually the terms I had were even better, because multiple orders were shipped and at the end of the month suppliers issued a statement which I paid with 7 days. My franchisees did likewise on pain of losing their franchise if they defaulted.

Walter
 

Ronak

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I have a supplier that does 30% deposit, with balance due 20 days AFTER it ships. Relationships can make a big difference in China.
 

biophase

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It was good to read that you can buy at 0% down and 100% payment after the goods are shipped. I enjoyed such terms when importing, and my franchisees gained that same benefit that resulted from me building a great relationship with suppliers. I had carefully cultivated an image of trustworthiness and integrity.

Actually the terms I had were even better, because multiple orders were shipped and at the end of the month suppliers issued a statement which I paid with 7 days. My franchisees did likewise on pain of losing their franchise if they defaulted.

Walter
One order I just totally forgot to pay for because it arrived and we put everything away. Naturally I assumed that anything that has arrived I've paid for. But they never asked for payment and had shipped it. Then a few weeks later they asked if I could pay for it. They were worried that I didn't pay because I didn't have the money.
 

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