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Home > Articles > Import in practice
Paying for goods in China
Source: www.BigChina.eu 2008-08-26 12:10:33
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All who decide to invest money into Chinese import will have to face a dilemma concerning the best way of paying for the goods. We would like to present you with the most frequent forms of payment in international commerce and point to their pros and cons. We are sure that such practical knowledge will help you to make a decision.

Western Union
Both in our service articles and forum discussions we warn the users against sending money through Western Union. Not all the beginning importers realise what danger is connected with this form of payment. The very procedure goes as follows: in any place marked by the Western Union trademark one fills in the form and later conducts the payment. He/she receives the so called Money Transfer Control Number (MTCN). The number should be passed on to the contractor whom the money is supposed to be destined for. He/she can take it in any Western Union post only after showing the MTCN number. It is a very dangerous form of payment since there is no practical possibility to trace what happens with our money. When we provide access to our number, the firm may take the money and break down the agreement so that we will not be able to get back the money. The responsibility lies on our side, since we trusted the partner to such an extent that the MTCN number became passed on to him/her.
Paradoxically, Western Union can also act positively at Chinese shopping. It works out well at small or sample orders – it helps to save time (of course, assuming that the deliverer has already put back the products for dispatch). Due to Western Union, we can reduce waiting time to one day. By choosing this form of payment, one should be absolutely ensured that he/she conducts the purchase from a trustworthy firm, otherwise the very process may end with a sad experience and money loss.

Telegraphic Transfer (T/T)
Telegraphic Transfer or Telex Transfer is the so called order of payout, namely the transfer. It is the most popular of payment forms used in international trade. One should conduct the transfer in a bank department (or by the Internet) into an indicated account. It is a relatively safe form of payment. The banks take a permanent payment for the transfer and a commission payment from the transfer amount. The money goes to a Chinese account in about 5 days; however, some banks offer the shortening of this period to 2 days, at an extra payment. Of course, it doesn’t mean that this form of payment is not burdened with a risk. A lot of factors depend on the trustworthiness of the firm we conduct business with. Since our money becomes transferred into a given account with teleaddress data attached, in the case when the contractor does not meet his/her obligations, it will be easier to determine his/her localisation. It is good to pay attention whether the account we are going to transfer the money into is a private or firm one. It we conduct business with a firm, it seems natural to transfer the money into the bank account. However, in order to avoid paying taxes in China, a lot of small enterprises decide to give us a private account number. So it does not have to mean dishonesty, but in such a case we should ensure whether we conduct business with a reliable firm.
A relevant role at conducting transfers in a foreign bank is ascribed to the SWIFT code. It has been established by the „Society for Worldwide Interbank Financial Telecommunication” in order to determine the banks’ identity. The codes ensure the safety of money transfer, since due to them the unit into which the money becomes transferred can be pointed out easily. The code is necessary for transfer conduction.

Letter of Credit (L/C)
A Letter of Credit means the bank’s written obligation to pass on the money to the firm after the reception of documents indicated in the agreement. It is a very safe form of payment, although very expensive and thus applied rather at very big orders. While paying by a Letter of Credit, there are four main subjects involved in all transaction: the buyer, the bank opening a Letter of Credit, a mediating bank and the seller. The very procedure goes through a few stages. At first the buyer secures a given money amount. The banks require security in the amount of 100-110% of the value of a Letter of Credit. Later the buyer provides the bank with instructions concerning conditions on which it (the bank) can reveal the money access to the seller. The seller presents the fulfilment of these obligations to the mediating bank which states whether the exporter fulfils agreement terms. If everything is correct, the seller will receive the money. The banks participating in the whole process take commission money in the amount established earlier.
From the importers’ point of view, the undoubted advantage of a Letter of Credit is the fact that this form of payment forces the contractor to fulfil the established obligations. Mostly the agreement signed by the parties assumes that the money will be passed on only if the seller presents the mediating bank with a confirmation note (consignment note or a bill of lading) proving the goods are already on the ship. It makes it possible to avoid many potential dangers connected with import.
Unfortunately, a Letter of Credit is an expensive and relatively complicated procedure. At relatively small orders it is just not much profitable. Additionally, it is very time-consuming. For small Chinese firms it is especially troublesome. Many of them do not posses an export license yet; thus in the process of the realisation of a Letter of Credit there will have to be involved an export mediator.

Documentary Collection (D/C)
Documentary Collection is a relatively cheap and simple form of settling a commerce agreement, especially when it is compared with a Letter of Credit. This form of payment deals with the release of documents negotiated in the agreement from the exporter’s bank to the buyer, at the mediation of the importer’s bank. The release takes place after the collection of the amount due indicated in the collection order (in practice, it is the sum coming from the commerce agreement concluded with the exporter).
Documents presented within the framework of a Letter of Credit by the exporter depend on notes in the agreement and used Incoterms formula. While deciding on such a payment form, it is best to agree with the contractor, within the framework of collection, for his/her giving out all the necessary documents, commerce invoice, confirmation of insurance agreement’s conclusion, CE certificates, declaration of agreement, certificate of origin and, above all, a document confirming the goods’ reception by the carrier, namely Bill of Lading (sea transport) or Air Waybill (air transport). If in the commerce agreement the parties refer to the specification of the product, according to which the exporter is supposed to produce/deliver the goods, it will be also good to receive the specification within the framework of Documentary Collection.
Documentary Collection works well in the case of partners who know each other well and share a mutual trust. The main advantage, apart from safety, offered by this form of payment is a longer time for money transfer. Besides, in comparison to a Letter of Credit, Documentary Collection does not require time-consuming actions related to the negotiations of conditions and opening of a Letter of Credit. Documentary Collection is popular to such an extent that it is served by almost all banks in Europe.