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The Basics Of Getting Paid When Selling To China.

By Dan Harris on Posted in Basics of China Business Law

I have a lawyer friend who is always saying “it’s incredibly easy to get clients…what’s difficult is getting paying clients.” The same holds true for selling product to China. The tough part is getting paid.

If you are going to sell product into China (or anywhere else internationally), you should consider employing the following to increase your chances of not getting stiffed:

  1. Secure all of the payment in advance. Sophisticated buyers typically will not accept this unless you put up a performance bond or open a standby letter of credit so that it can get its advance payment back. Note, however, that it can sometimes be difficult for Chinese companies to obtain government approval to make full payment in advance.
  2. Conduct due diligence on your buyer.
  3. Secure some of the payment in advance. This obviously will not guarantee you full payment, but it is better to lose some as opposed to all from a sale.
  4. Secure a Documentary Letter of Credit. With this, you will be paid when there is documentary evidence you have shipped the product according to the terms and conditions of the letter of credit. Smart buyers typically require an inspection certificate to ensure the product complies with the specifications in the contract or the purchase order. This sort of letter of credit mitigates your risk because your buyer’s bank has irrevocably guaranteed to pay upon presentation of the required documents.

We generally recommend our clients secure this letter of credit from a major (not a tiny) Chinese bank, such as Bank of China, China Construction Bank, Industrial and Commercial Bank of China, China Development Bank, and Bank of Communications, or a  branch of a known American, Asian or European bank. WARNING:  We have seen more than our share of fake letters of credit.

To encourage exporting, many countries, including the United States, make it fairly easy and cheap to purchase insurance to cover an improper non payment on the letter of credit.

There are all sorts of variations on the above, but these are the basics.

  • Twofish

    You probably want to go through a local confirming bank and have them arrange the details of the LOC. The confirming bank will guarantee that the letter of credit is good and will guarantee payment.

  • CC

    We require our foreign buyers pay 30% up front, 30% upon completion of our product, and the remaining 40% upon delivery. This has worked very well for us, a custom manufacturer of industrial equipment that sells for ~$100,000. A few Chinese companies have refused these terms and gone elsewhere, but almost all accept them.

  • Edward Mu

    How ofter is the LOC used in transactions with China? If the issuing banks in China refuse the payment upon presentation of documents, is there any recourse for that? Since all the banks mentioned in the blog are government-owned banks, and the holder get a judgment from its local court, is there any way actually to enforce that judgment?

  • M. Powter

    Thanks for running this. Very helpful. Do you see Chinese companies getting better or worse in terms of their paying?

  • Twofish

    LOC’s are the standard method of international transactions.
    You can try to sue a Chinese bank for non-payment of documents. The trouble is that gets you into all of the problems with suing a bank in a foreign country, and you want your money now. The reason you want a local confirming bank is that they will guarantee payment if something goes wrong. You get your cash and it’s now their problem.
    Also, in practice court judgements are not the main sanction for payment of LOC’s, because courts are slow and judgements hard to enforce. The main sanctions, as with much of banking, are reputational. If the bank fails to pay on a proper transactions, you tell all your friends, and they stop using that bank.

  • Yurtdışı Eğitim

    Please explain letters of credit more fully.

  • robertb

    Twofish, last time I checked Bank of China had a branch or two in New York.
    Minimal contacts … are you a lawyer?

  • http://www.2009allstar.com NFL jerseys

    You can try to sue a Chinese bank for non-payment of documents. The trouble is that gets you into all of the problems with suing a bank in a foreign country, and you want your money now. The reason you want a local confirming bank is that they will guarantee payment if something goes wrong. You get your cash and it’s now their problem.

  • Bailey

    How very true. Actually, the only way to guarantee not to get cheated is not to do business with China.

  • HJH

    @Bailey Actually the only way to guarantee not to get cheated is not to do business period…

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