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4. Best Payment Method and Incoterm?
Post 1 of 20
Rizzob Moderator
offline My Company Website
Overall Ranking MVP:17,822 Rank:22
Due Diligence Step 4 ...
In Due Diligence Steps 1-3we reviewed our Business Plan, learned our homelandCertifications and then applied these to Negotiate Price.
In this Sep 4, we nowlook at Payment and CargoDelivery Methods.

The focus of this topic is to help you decide your payment and Incoterm. Be aware that Alibaba does not participate in the transactions on this website. Shared risk of payment isbetween the buyer and seller. Itis your responsibility to clearly define your role in the transaction. Compare the benefits and drawbacks of the available payment methods and Incoterms to decide what is appropriate for your situation.

1. Payment methods ...

Alibaba has a special"Payment and Finance" forum for you to discuss and/or learn the finer points of paying for your goods:

http://resources.alibaba.com/discussion_board/86/payment_finance.htm
Alibaba's "Payment and Finance" forum

Here is an article and a brief overview of popular payment methods in international trade. (Includes TT, L/C, Escrow, **, Open Acct.), also includes diagrams for L/C and D/P:
http://resources.alibaba.com/article/44/Popular_payment_methods_in_international_trading.htm

Additional Information on Telegraphic Transfers of money (TT). Payment and Finance Discussion on why China prefers TTs.
http://resources.alibaba.com/topic/17803/Why_China_prefers_TTs_.htm

Additional Information on Letters of Credit (L/C) from ourPayment and Finance forum:
http://resources.alibaba.com/topic/16932/Discussion_Important_details_about_L_C_s_Letter_of_Credit_.htm

In-Depth article about Understanding L/Cs:
http://www.crfonline.org/orc/cro/cro-9-1.html (Part 1)
http://www.crfonline.org/orc/cro/cro-9-2.html (Part 2)

Additional Information on Escrow Service. Fake escrow websites do exist.BE CAREFUL. Here'sa link to some legitimate escrow services:
http://escrow-fraud.com/legit-escrow.html

Discussion about D/P from Payment and Finance Forum:
http://resources.alibaba.com/topic/15683/Dangers_of_D_P_.htm

Additional Information about other Payment Methods and Risks - Paypal:
http://resources.alibaba.com/topic/10946/Lets_all_put_PayPal_on_the_shelf_and_discuss_payment_and_costs_.htm

http://resources.alibaba.com/topic/10294/How_safe_is_paypal_.htm

Western Union / Moneygram.Extremely RISKY. Read about them here:
http://resources.alibaba.com/topic/17854/Western_Seller_asks_Western_Union_payment.htm
http://resources.alibaba.com/topic/18538/Wesren_Union_PASSWORD__SAFE_.htm
http://resources.alibaba.com/topic/14736/Paying_with_Western_Union.htm


2. Incoterms 2000 ...

Alibaba has a special"Insurance and Trade Terms" forum to learn and discuss the finer point of Trade terms like FOB, etc:

http://resources.alibaba.com/discussion_board/85/insurance_trade_terms.htm
Alibaba's "Insurance and Trade Terms" forum

Incoterms are an international standard which clearly definethe responsibilities and risks of the buyer and seller while goods are transported. It'sstrongly recommended that you become familiar with, if not memorize, all 13 incoterms.

Link to an Alibaba article on introduction of Incoterms:
http://resources.alibaba.com/article/949/Incoterms_an_introduction.htm
Understanding Incoterms 2000

http://resources.alibaba.com/article/47/The_language_of_trade_deals_understanding_Incoterms.htm
A comprehensive link resource from the Insurance and Trade Term forum

http://resources.alibaba.com/topic/10968/EVERY_TRADE_TERM_FOB_CIF_L_C_etc_.htm
Every Trade Term ... all you ever want to know about Trade Termsand what they mean
Robby [em1][em1][em1]
Thanks Robby, here's the legal bits you asked me to add ...
3. Important difference between Payment and Incoterms ...
Payment for goods and Delivery of goods are two very separate legal matters.Broadly, you become the legal owner of the goods when you take delivery ofthe goods. You might pay for the goods before or after you become the legal owner. Payment has little to do with legal ownership of the goods. Thus, making Payment and taking Delivery/Ownership are very different issues.
Delivery to you, in the legal sense, can occur at any one of manyplacesbetween yoursupplier's foreign factory and your own home depot. It depends on which of the 13 Incoterms you agree. The most usual Incoterm is FOB (Free on Board). You see contract terms like "FOBShanghai". This means the goods are legally delivered to you by your Shanghaibased supplier at the very instant your goods pass over the ship's rail in Shanghai port.From that moment you legally own the goods and therefore the cost and risk of shipping is your very own. A B/L (Bill of Lading) is of course a certificate issued by the shipping company verifying that the goods are aboard the ship.
Obviously you can't arrange to pay for the goods at the instant they swing over the ship's rail in Shanghai port whenyou become the legal owner under FOB.Therefore whenand how you pay for the goods is very different to when you become legal owner of the goods - especially if you are not paying by LC (Letter of Credit).
Transactions less than $30-$50k are hardly worth the extra cost of arranging an LC with your bank.Accordingly, the timing of exactly when you pay for the goods can make for some interesting negotiating.YourChinese supplier will be precisely aware of the legalmeanings of different acronyms.You must learn these meanings to avoid getting caught out by innocent looking termslike Ex Works.
4. Arguments about when to pay the70% balance...
Usual terms from a Chinese Supplier are"$xx FOB,30% deposit by TT".
The usual silence about exactly when the 70% balance is paid is deafening. Do you pay it afterthe goods are the ship (when you legally own the goods)? Or, do you pay it before the goods are on board (before you own the goods)?
Afteryou pay the 30% deposit, yoursupplier (sensibly)will ask you to pay before the goods are loaded on the ship.You are likely to counter with "Hey, I'll pay when I know mystuff is on the ship". So, an argument develops. From yoursupplier's viewpoint, you might fail to pay for the goods after they go onto the ship creating a legal nightmarewhen the goods arrive in your port.From your viewpoint, what happens if yoursupplier fails to put the goods on the ship after you pay? How do you recover your money in China?
The competing viewpoints are equally valid (anddocumentary evidence the goods are actually on the ship is of course the BL issued by the shipper).
So, it's critical to negotiate exactly when the 70% balance will be paid.
5. Agreement fortiming to pay the 70% balance...
Sensibly, you are requesting"$xx FOB [named port], 30% deposit by TT, balance payable against BL".
Sensibly, your Supplier is requesting" ... balance payable against Invoice" or other loose words to avoid payment against BL after loading the goods on the ship.
But, take a moment to consider that a BLdoes not guarantee the nature ofwhat has been delivered on board the ship. It may be a container full of old house bricks for all you know.
Apractical wayto resolveboth your own and your supplier's uncertainties isa Pre-Shipment Inspection.
So, the contract term becomes "$xx FOB, 30% deposit, balance payable against satisfactory pre-shipment inspection".
From your viewpoint, the very act of doing a pre-shipment inspection not only guaranteesthe goods are authentic but also givescomfort that the goods are likely to be loaded on the ship.
From your supplier's view point, the very fact that you will pay only against apre-shipment inspection is great incentive for yoursupplier to prepare goods which the inspector will not reject.
Accordingly, pre-shipment inspection is a win-win for both you and your supplier. It resolves the double dilemma of when to make payment and whether the goods are authentic. And, you can also take the additional step of seeking Escrow payment if you have any doubt that the inspected goods will actually be sent.But, such is hardly necessary as your pre-shipment inspector should be able to read local signals in that respect.
A pre-shipment inspection of goods to the value of about $5-$10k is likely to cost only $100-$200.
Here's an example of just one Chinese Inspector, Tony Chang (who I believe is an excellent low costInspector):http://tonyinspection.blogsome.com/category/goods-inspection/
6. Now about that 30% deposit ...
So far, we developed the contract term to read: "$xx FOB [named port], 30% deposit, balance payable against satisfactory pre-shipment inspection".
We need to go one step further because there are different sorts of "deposits" in Chinese contract law.
The wording in the above term treats the deposit as merely part payment of the contract price. We need to change those words to take advantage ofArticle 115 in Chinese contract law where the supplier must refund double the deposit in event of default only if the deposit is paid by way of security. The doublerefundapplies to the first 20% of purchase price.
Thus our preferred contract termbecomes: "$xx FOB [named port], 30% security deposit in accord with Article 115 of Chinese Contract Law. Full contract price to be paid againstsatisfactory pre-shipment inspection withsecurity depositapplied as part payment".
The Article 115 provision limits the double refund toa security depositequal to 20% ofcontract price. If the price is $10k and wepay 30% or $3k security deposit, the supplier will be liable to repay $5k against the $3k we actually paid. In other words our30% deposit will cost the supplier a sum equal to 50% of contract price if it defaults.
Article 115 does not apply if we merely state "30% deposit". The deposit must be clearly identified as a security deposit under Article 115.
7. In Summary ...
Bydeciding to pay a nearnegligible sum for a pre-shipment inspection and by adding a few words to the contract terms, we have achieved:
1.Due to the pre-shipment inspection provision, our supplier will be doubly careful to selectproductsexactly in accord withthe agreeddescriptionand quality of the goods.
2. Due to Article 115, our supplier will be think twiceabout defaulting on his obligations for riskto repay double thedeposit in the eventof default.
3.Oursupplier is covered against risk ofnon-payment before he surrenders possession of the goods (because we agree to pay before the goods cross the ship's rail).
4.By virtue of our pre-shipment inspection, we have comfort that the goods are actually inthe shipment process.
5.We can't get much better security thantying our 30% deposit to Article 115 and our70% balance topre-shipment inspection.
6. Perhaps most importantly,our supplier knows we arenot amateur buyers to be taken lightly.
.
Bottom line ... includepre-shipment inspection and Article 115 inyour payment termsand you're sure to get a good night's sleep.
Aussie [em1][em1][em1]
04 Oct 2006 08:13
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Post 2 of 20
Business in China
offline
No Company Website yet
Overall Ranking MVP:28,528 Rank:6
Replying to [Rizzob]:

Thank you so much, very useful information. You're a helpful guy! [em19][em19][em19][em19]
09 Oct 2006 05:57
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Post 3 of 20
Deepali
offline My Company Website
Overall Ranking MVP:-63 Rank:1,967,921
Replying to [Rizzob]: too long to read [em4]
* Then don't read it, nobody's forcing you - Rizzob *
10 Nov 2006 01:16
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Post 4 of 20
mohamadalkady
offline My Company Website
Overall Ranking MVP:9,417 Rank:102
Replying to [Rizzob]:

[em16] good effort Rizzob
11 Nov 2006 13:15
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Post 5 of 20
igorko
offline My Company Website
Overall Ranking MVP:162 Rank:2,007
Replying to [Rizzob]:
HELLO, I HAVE RECEIVED AN EMAIL WITH THIS "We would work towards FCL. But in case we have LCL then either you can quote
me including Special packing or Freight as separate (where we only rent
space in a container)" Coudl someone help me out?

THANKS BEFOREHAND
13 Nov 2006 02:25
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Post 6 of 20
Aussie Moderator
offline My Company Website
Overall Ranking MVP:23,739 Rank:14

 

Your potential buyer wants you to give him two freight prices.

First for a FCL (Full Container Load).

Second for a BCL (Broken Container Load - part only of a container space).

Contact your local shipping office and/or freight forwarder to get the prices.  [em1]

13 Nov 2006 22:58
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Post 7 of 20
Foow
offline My Company Website
Overall Ranking MVP:18,213 Rank:19
Rizz/ Aus/ others,

Guys..... is there a way these articles can be archived as a PDF by any chance? Even Word would be good.

If there is any real use for the forums these types of articles are way way at the top of the list for "helpful stuff"

Any chance the Mods could get together and see if this is possible with the all-powerful Admin?

Having these articles as "back checking" on my desk is something I would consider HUGELY helpful!

oh yeah..... Any chance you can get them locked into the board in numerical order since they keep moving around..3/5/1/2/4/11/8 right now... lol
09 Jan 2007 22:01
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Post 8 of 20
katrina0578
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Overall Ranking MVP:44 Rank:1,807,514
Replying to [Rizzob]:
[em18][em16][em17]
09 Jan 2007 23:08
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Post 9 of 20
artelati
offline My Company Website
Overall Ranking MVP:138 Rank:2,823
a little complicated,but useful
23 Jan 2007 11:01
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Post 10 of 20
Thomas1976
offline My Company Website
Overall Ranking MVP:5,273 Rank:114
Replying to [Rizzob]:
A very good guide but I got to stay up late clicking on links. [em9]

I understand why Chinese like to use TT payment, but I do not understand why foreign buyers would not insist on LC. Enlighten me please
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23 Jan 2007 17:21
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Post 11 of 20
donghu zhu
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Replying to [Rizzob]:heihei
23 Jan 2007 22:53
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