James F. M.
Looking for opportunities to serve on board of directors for non-profits
What are some cheaper alternatives to L/C for international trade?
If you want to do business outside of the United States with countries/merchants that do not take credit cards and want also avoid expensive L/C fees while providing both protections against quality of merchandise and fraud, what are the alternatives?
Answers (9)
The most common payment method is a bank wire. It usually works this way:
- You make sure you work with serious people: ask for customer reference, run background checks, and/or perform factory audits.
- You develop samples until you are confident the suppliers knows exactly what you want.
- You wire a 30% deposit before production starts.
- You pay a quality assurance firm to inspect product quality.
- You wire the remaining 70% before shipment.
- The supplier ships the goods and sends you the documents by express courier.
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Etienne C.
China Industrial Sourcing | Renewable Energy | Energy Management Services in China | Experienced China Executive
Adding on Renaud information, a possible alternative to L/C is what I call the L/C of the poor:
1. You pay first the down payment that you can negotiate (from 0% to 30%). 30% should be the maximum.
2. Once the supplier confirm the goods are ready, you ask your inspector to check the goods. If everything is OK, you release the goods (allow the goods to be sent to the ship
3. Once the goods are on board of the ship, the supplier gets the Bill or Lading (B/L)
4. You ask the supplier to send you a copy of the B/L
5. If everything is OK on the bill of lading (it is important to check this thoroughly), then you pay the final payment to the supplier
6. Once the supplier receives the payment, they send you the original B/L
This is not fool proof, but the incentives are properly placed:
- if you do not pay the supplier knows you will never get the goods, so there is not much incentives for you not pay
- if the supplier gets the money but does not send you the original B/L, they still do not get any advantage since the goods are sent out, so there is no reason to do that.
However, this is not foolproof. The L/C is the only way to really get some security.
So, it is up to you to evaluate whether the cost related to the risk of loosing one shipment you paid for is lower than the cost of a real L/C. The higher the value density of your product, the higher the risk is.
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Export Credit Agency insurance can be a viable option. Comparable in price (sometimes cheaper) and with less paper turnover. We assist our customers a lot in working with this type of instruments.
Pierre D.
Professor of International Logistics/ Import-Export Operations Management
Best Answers in: Exporting/Importing (5), Internationalization and Localization (2), Customs, Tariffs and Taxes (2), Treaties, Agreements and Organizations (1)
James:
There are multiple alternatives:
1. A documentary collection, in which a bank in the importer's country acts as your representative, and does not release the documents (BOL and invoice) to the importer until the importer has paid you (documents against payment [D/P]) or the importer has signed a promissory note or a draft (documents against acceptance [D/A]. This is a moderately expensive alternative; cheaper than L/Cs, but not as secure.
2. The use of a proprietary system, such as TradeCard or Bolero, which are roughly identical to a credit card, but make sure that the documents are not released before payment (protects the exporter), and make sure that the documents are in order before paying the exporter (protects the importer). Cheapest alternative, and very secure, but both exporter and importer have to "belong" to the network.
3. An open account transaction, secured by a credit insurance policy, which is what Valeriy suggests. Relatively inexpensive, very importer friendly (the importer has to do nothing), and very good commercially; no deal has ever been lost because the exporter asked for an open-account transaction.
4. Cash in advance; asking the importer to pay before shipment is made. Unless the importer is really in need of your product, it is unlikely that it will be willing to pay for the goods ahead of shipment.
You can find information on these methods of payment from a textbook in international logistics.
Finally, an L/C does not protect the importer against shoddy merchandise or fraud, unless the L/C requires a pre-shipment inspection certificate.
Contact me if you need more information on the above.
Pierre
Verónica E.
Export Specialist. International Trade Professional. Former Advisor to the National Bureau of Export Promotion
In my experience, wire transfer is the most common and cheapest alternative. I used this method to collect the money for all the export operations, of course you need to know your client at least by references.
If not, try taking an insurance, ckeck COFACE: http:// www.coface.com
The Credit insurance protects companies against the risk of customer default. Another way is to ask Coface for information.
Good luck.
Wallace J.
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The US government offers a number of ways to lower costs & mitigate risks in financing international transactions. However, as I'm sure you're aware, there are some trade-offs with working with governmental organizations; bureaucracy, red-tape, general slowness, etc.. Regardless, hope these help.
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I completely agree with Professor Pierre David, he points out every facet of the transaction.
He rightly points out that even L/Cs are not not fool-proof.
In addition, I feel that quantity and money also play a crucial role, if you have something which costs USD10,000 and then perhaps some advance and the D/A or D/P works best - the importer/exporter both would be at ease, but if the transaction amount it more - then both will be cautious.
So it all depends on the feasibility of the charges and the amount involved - Paying 3~5% on a 10,000 tranx is feasible, as compared to on 100,000 - and so is safety on both sides.
