The growing number of cancellations and nonpayment cases is leading many China suppliers to protect themselves from potential losses.
The financial squeeze in global markets is pushing an increasing number of China exporters to require risk-free payment methods or apply for credit insurance. The latter is gaining ground particularly for suppliers of high-value products.
Many small and midsize operations now specify TT as their preferred mode of payment. Compared with an L/C, TT is the fastest and most secure option for exporters. With this method, manufacturers ship out goods only after the money has been credited to their bank accounts.
Small household appliance maker Foshan Shunde Qifei Electric Co. Ltd and freezer producer Foshan Shunde Weili Kitchen Equipment Co. Ltd accept only TT as a form of payment.
Admittedly, TT is only completely risk-free for manufacturers. On the buyers' side, it requires trust that their suppliers will deliver on time and follow specifications. This is not a chance most customers are willing to take and businesses that refuse to accept other forms of payment inadvertently limit their export opportunities. Some companies, however, allow for mixed modes, receiving 50 percent or less of total purchase price via TT.
Larger manufacturers usually accept various types of payment methods, including via an L/C or an O/A. In such cases, many also buy export credit insurance to offset risk, including nonpayment. Similar to international credit rating companies such as Moody's, China has a number of watchdog organizations that analyze the risk of doing business with different countries. Among them are Dagong and China Export & Credit Insurance Corp. (Sinosure). It is these credit reports that big companies look at to determine whether to insure an order or not.
Home appliance maker Guangdong Galanz Enterprise Group Co. Ltd buys short-term export credit insurance for all orders to be paid via an O/A and for some L/C transactions. This proved to be a valuable investment because the company was able to receive compensation from Sinosure against two nonpayment cases from an EU customer. The entire process took no more than three months.
Breathalyzers manufacturer Henan Hanwei Electronics Co. Ltd, on the other hand, evaluates a client's credit history and payment capability before insuring an order. Among the factors it looks at is the credit rating of the country where the buyer is based and if the customer tends to request payment deadline extensions. Although the company has purchased credit insurance for a few orders, so far none of its clients has defaulted on their payments.
Carpets and rugs exporter Shenzhen Dotcom Houseware Products Co. Ltd tries to gauge from e-mail communications and business meetings whether credit insurance is needed for a particular buyer's order or not. The company has not yet insured any order.
But the growing number of nonpayment cases, which came first as a result of the global economic downturn and now due to the ongoing debt crisis in the EU, is encouraging more suppliers to apply for export credit insurance. This is particularly true for those offering high-value products.
Sun Fenix Intl Trading Co. Ltd was burned once. Its customer from South America drafted an L/C, but the issuing bank then closed down so Sun Fenix was unable to receive the payment. The company was able to sell the order of electric home appliances to other clients.
Shenzhen Hali-Power Industrial Co. Ltd, a maker of battery packs for digital products, plans to buy credit insurance for orders exceeding $100,000. Transactions below that amount have to be settled via TT.
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