General

Payment has always been a highly valued issue in foreign trade. Cross border transactions involve funds, and both parties naturally worry about security issues. Customers hope to reduce risks, and domestic traders also do the same. So besides price, payment method is also a very core link in foreign trade negotiations, and risk measurement is of utmost importance.

Taking this opportunity today, I will talk about some common foreign trade payment methods and some misunderstandings that everyone has.

01. The risk levels for L/C and D/P are the same

Firstly, there are L/C and D/P.

I put these two together because their operation methods are basically the same, both of which are document transactions and endorsed with bank credit.

In my opinion, the risk levels of these two are the same, and many friends may have objections when seeing this:

That's not right, I clearly remember that L/C is safer

The difference between these two is that L/C will have a letter of credit, while D/P has nothing.

These are all psychological effects, and people often feel that having a proof in hand would be more reassuring, so they feel that L/C is safer.

Generally speaking, there may be some discrepancies in a letter of credit, but rest assured that as long as there are not very serious discrepancies, the bank will not refuse payment.

Some friends may worry that the letter of credit does not match, leading to refusal of payment. In fact, there is no need to worry, as long as the materials are prepared, there will be no major problems.

D/P is also the same process, but because it does not have a letter of credit, there are no discrepancies and no fees for discrepancies will be deducted.

Compared to others, I personally prefer using D/P because it is more direct and convenient. If some friends cannot pass the psychological barrier, they can still choose to use L/C.

02. T/T risk and convenience coexist

T/T (telegraphic trader), sometimes written as wire transfer abroad, is the foreign trade payment method that I will focus on today.

T/T is the favorite payment method for many foreign trade professionals, because compared to other methods, the operation of T/T is the most convenient and simple, and even newcomers will be the first to come into contact with it.

But many friends have a misconception that T/T is indeed very convenient and fast, but if you think T/T is very safe, that's wrong. T/T also has many security risks.

As mentioned earlier, both L/C and D/P involve banks. If a customer defaults and refuses to pay, the bank will not collude with the customer without reasonable reasons.

But T/T is different. It involves customers directly transferring funds to their bank accounts. If the customer has financial problems or is cheating, the risk is very high.

Unless all risks are transferred to the customer and payment is made before shipment.

But I think the vast majority of customers will not agree, and it is difficult to operate in practice because customers cannot trust you 100%.

So many suppliers will choose a compromise solution: collect a deposit.

Previously, the backend received a question about the deposit. Let's take a look at his question first:

Hello Bingda, we have received an order from an African country for nearly 300000 US dollars. The price has been negotiated, but the payment method is still pending.

I learned that the client had previously collaborated with a foreign trade company in Suzhou, which is D/P.

We have investigated the client and found that they are not a large company, and their previous cooperation with the Suzhou company was not significant.

We consider the risk, after all, 300000 US dollars is not a small amount, so we want T/T, pay a 30% deposit, and then pay the full payment before shipment.

Our professionalism, service, and price have all been recognized by the customers. We would like to negotiate quickly. Is it necessary to collect this deposit?

03. Control the level of risk

In response to his question, I replied as follows:

To be honest, for African countries, I suggest that except for South Africa, other countries should basically try to be as careful as possible.

After all, even if China Export&Credit Insurance Corporation can accept this case, the final compensation ratio will not be very high.

Pay the balance before shipment, unless it is a small order, it is basically impossible to do so.

Because the other party is also a foreign exchange control country, there is no USD to pay you in advance, and it is not realistic for customers to purchase USD on the black market, as the cost is too high.

Only a letter of credit can meet the needs of most African countries, and of course, D/P is also similar.

So no matter what, I suggest charging a portion of the deposit, even if 30% cannot be negotiated, and 20% or even a little less is acceptable.

In the absence of a deposit, the risk on your end will be relatively high. As long as the other party casually cancels the order, you will suffer heavy losses. You must strive for what you should strive for.

04. Standardized operating procedures

I also want to remind everyone about T/T that it is necessary to standardize the operation process.

Previously, a friend made an order with a logo, with a value of $8000. They agreed with the customer and arranged production the next week after paying the deposit.

As a result, one week after receiving the receipt, the money did not arrive. When asked, the customer said that the information was incorrect and the bank returned it. They will arrange again later.

As a result, the goods have been ready for almost two months, and the customer has been delayed in making payments. The deposit has been returned without any rescheduling.

Later, when asked again, the customer no longer wants this batch of goods, but the goods with the customer logo are difficult to sell even at a low price.

This is a process issue, don't be confused. Once the customer pays, you can tell them that you are preparing materials and will immediately arrange production.

But this is just an official response, just a statement, not asking you to immediately arrange production.

You must wait for the money to arrive before arranging the subsequent matters.

In the case of this friend, he is very passive. The money is not in hand, and the customer doesn't want the goods anymore. If he doesn't have credit insurance, he really has no choice but to admit it himself.

Even if you work hard and waste money to pursue cross-border lawsuits, it doesn't make any sense.

Spend a few years and possibly hundreds of thousands of dollars to win, and if you win, you can get back 8000 dollars. It's just a gamble, without any economic value.

05. Be cautious when choosing O/A

Finally, let's talk about O/A, which means credit sales.

In a sense, O/A is actually a post T/T approach, which is also a favorite among many large buyers, especially in the United States.

If it is O/A 90 Days, it means payment will be made to you 90 days after shipment.

This foreign trade payment method assumes all the risks for the supplier. Once the customer cancels the order, all the initial investment will be ruined, and the losses will be borne by the supplier themselves.

For example, if your product is shipped and a problem is found abroad, and a customer complains, even before or after the payment date, your money will not be received.

I can only wait until the matter is settled before making the payment to you.

As I mentioned, these situations all exist, after all, not every customer is honest, and unscrupulous merchants are everywhere.

Even in the most reputable countries such as the United States and Switzerland, there is a possibility of this.

So if you are a new customer who has just collaborated with, you must be cautious and then cautious when doing O/A.

If you are an old customer who has collaborated with many times, or a reputable large buyer, and you are not short of money now, you can consider doing O/A.

Even if you are sure to do O/A, you must control the risk well, but remember to do credit insurance.

In case of any problems, the insurance company can also compensate a portion to minimize your risk.

In fact, each foreign trade payment method has its advantages and disadvantages, and it is best to make a choice based on one's own specific situation.