Foreign trade payment risks must be prevented (Attention cross-border e-commerce sellers and foreign trade professionals)

Risk Prevention of Foreign Trade Payment Methods

When it comes to the end of the order negotiation, the two most concerning matters are: first, the transaction price, which basically determines how much profit the order can bring; second, the payment method, which not only determines whether the order can be safely received but also whether it can bring the expected positive cash flow.

Today, let's take a look at the risk levels of various payment methods, from low to high: 100% T/T advance.

Note that this is payment before production, not payment before shipment. This payment method means that the full payment is received before production starts. For the exporter, this method has zero risk, but for the importer, the risk is the highest, generally applicable to sample orders or small orders.

T/T deposit + T/T balance paid before shipment.

This payment method is very safe; the higher the deposit ratio, the higher the safety factor. Of course, there are some extreme cases where the customer abandons the goods or goes bankrupt after paying the deposit, but this probability is very low.

If the situation arises where the deposit is received but the customer abandons the goods, as long as the goods have not been shipped, they can be resold to other customers or handled at a lower price, so there are still many countermeasures.

T/T deposit + balance with sight letter of credit.

Generally, it is 30% T/T, 70% balance with letter of credit; the higher the T/T ratio, the better. With this payment method, the documents can only be submitted after the goods are shipped and the bill of lading is obtained.

The biggest risk of receiving payment via letter of credit is that the customer may refuse payment after discrepancies arise, but after the customer pays the T/T deposit, they will generally accept payment for discrepancies even if there are issues with the letter of credit, so this payment method is also very safe.

It should be noted that exporters should first collect the T/T deposit, followed by the balance with an irrevocable sight letter of credit.

There was a case where a customer from Bangladesh used a 70% letter of credit as a deposit and 30% balance with T/T against documents, which is very unsafe because after the goods are shipped and the full set of documents is obtained, if the customer does not pay the T/T balance, the exporter's situation will become very awkward. If the documents are not submitted, port charges will incur when the goods arrive, and if the documents are submitted, the customer may not pay the balance, leaving no effective means of constraint.

The above three payment methods are relatively safe. If exporters are strict about risk control, these three methods are definitely the first choice, and there will basically be no bad debts or risks of not receiving payment. However, in addition to the payment methods themselves, exporters also need to consider the specific economic and political conditions at the time.

Partial deposit + partial balance against a copy of the bill of lading.

This is the most commonly used payment method, with the most common ratio being 30% T/T + 70% balance against a copy of the bill of lading. In actual operations, there may also be variations, such as for some long-term good customers, a 20% T/T + 80% balance against a copy of the bill of lading can be adopted.

This payment method also has a relatively high level of safety, but there are also certain risk points:

1. Significant changes in the customer's business situation. For example, if the customer's funds cannot be turned over and the capital chain breaks, it may lead to a situation where they have paid part of the deposit but are unable to pay the balance.

In response to this situation, exporters should investigate the customer's strength and business conditions before determining the payment method. Specifically, they can Google the customer's background or inquire with other domestic suppliers of that customer.

If there is not much confidence in the other party's credit, they can adopt the method of increasing the deposit ratio, such as raising the deposit to 50%, which greatly reduces the risk of the customer abandoning the goods.

2. Sudden changes in the international environment. For example, if the exchange rate of the customer's country suddenly drops sharply, if there are some orders where the customer's deposit ratio is relatively small, like around 10%-20%, the customer is very likely to abandon the goods.

There are also situations influenced by war; in such cases, exporters need to pay close attention to the international environment and international situation. When encountering customer orders from economically unstable regions, they can reduce collection risks by increasing the deposit ratio or requiring full payment before shipment.

3. The third situation is fraud. A small number of unscrupulous freight forwarders may collude with customers, leading to situations where goods are released without documents.

4. Regulations in some South American countries. If the consignee on the named bill of lading is the actual importer, they can pick up the goods with a copy of the bill of lading. These countries mainly include Brazil, Nicaragua, Guatemala, Honduras, El Salvador, Costa Rica, Dominican Republic, and Venezuela.

In response to this situation, exporters should try to use To Order for the consignee on the bill of lading, meaning the consignee is uncertain and based on the shipper's instructions. The shipper can endorse the bill of lading after receiving full payment, which means stamping the shipper's English name on the back of the bill of lading and then sending the original to the customer.

To summarize, for the T/T deposit + balance against the bill of lading payment method, there are several ways to reduce collection risks:

1. Try to use To Order instead of the actual consignee's name as the consignee on the bill of lading. This can increase the shipper's control over the goods, but there is a downside: To Order instructions cannot be released electronically. When encountering customers who need electronic release of the bill of lading, the consignee must be changed to the customer's company to release electronically.

2. Increase the deposit ratio as much as possible. When the economy of the importing country/region or the customer's business situation changes, this can reduce the risk of the customer abandoning the goods. Even if the customer does abandon the goods, the deposit can compensate for the costs of retrieving and reselling the goods.

3. Clearly specify that the balance should be paid within 5 or 10 days after seeing the bill of lading, giving the customer a payment deadline. Some customers, due to cash flow considerations, prefer to delay payment until the goods are about to arrive at the port. Some maliciously delaying customers may even deliberately refuse to pay. Delayed payment can lead to exchange rate losses for exporters, so this can be used as a basis for claims.

4. Closely monitor the international situation and strictly control payment methods for high-risk countries/regions. For example, if there are significant exchange rate declines or political instability with war risks, when encountering customers from these countries/regions, especially before accepting orders, it is crucial to carefully examine the risks associated with the payment methods.

Warning Reminder: Precautions for Collection from High-Risk Countries

Suggested verification methods:

First, have the customer pay a deposit to see if it can be normally credited to the bank. If it is an old customer with recent transactions, it can be relatively flexible, as there has been a normal credit experience. However, having a deposit is always better, as it reduces customer credit risk and allows for timely responses to changes in overseas sanctions and bank policies.

Second, after learning about the customer and the payment bank, independently verify the customer's and payment bank's sanction/risk information.

Suggested risk responses:

First, for countries/entities clearly listed on the sanctions list, it is generally not recommended to continue trading.

Secondly, after verifying the normal remittance bank, agree in writing with the customer that future payments must be made through this bank to avoid unnecessary risks and disputes.

Thirdly, for DP payment methods, ensure that the US dollars are credited before releasing the order.

Finally, insure export credit insurance to transfer risks.

Pay attention to five key points when negotiating payment methods:

First: Investigate and analyze the customer.

Regarding the significance of payment methods, it is recommended to first understand the customer's basic situation. Look at the customer's scale, matching degree, and purchase volume:

01. Research the customer's inquiries, including questions posed to the customer in email correspondence (consideration and probing).

02. Research the customer's company website (several main pages and download the customer's E-Catalog, study and find valuable information points).

03. Search engine search techniques (Google, Google Maps, etc.) to understand the customer's strength, online activity, online B2B inquiry records, self-introduction in industry directories, upstream and downstream customers, main customer groups supplied, etc.

Second: Always remember where your bottom line is.

Some salespeople in foreign trade companies are too eager to get orders when discussing payment methods with foreign customers, disregarding risks and compromising too easily on the customer's payment methods. When risks occur, the losses are huge.

Payment methods should be controlled as much as possible; some compromise is acceptable, but it is essential to stick to necessary bottom lines to avoid the risk of not being able to recover payment later. If you compromise, future cooperation will be a hundred times more painful than the current negotiation.

Third: Pay attention to the order and rhythm of negotiations: when discussing orders with customers, try to put payment methods at the forefront.

Fourth: Try not to pressure the other party with company policies in the initial stage.

Every customer has different purchasing habits. Throwing out company policies right away can feel like forcing the customer, which may lead to a "break" in communication. The customer may remain silent or quickly respond with: Sorry, our company also has regulations; we only do L/C.

Additionally, in case of disputes, never immediately say you need to consult a leader. Doing so may leave you with no way out. It is better to consult the leader when the negotiation reaches a certain stalemate; this is a reasonable approach.

If you ultimately cannot obtain a satisfactory payment method, mention that company policies are such that, as a salesperson, I really cannot violate the company's policies.

At this point, there are two options:

01. See if we can do better on the price? (Do not compromise on payment methods)

02. Let me consult our leader to see if we can make some concessions? (Prepare to compromise to a certain extent)

Fifth: Use reasonable tactics and language.

(1) Price temptation.

Payment methods and prices can be mutually utilized. When encountering difficulties in discussing prices, you can try to offer a better payment method to attract customers. When discussing payment methods, sometimes to obtain an ideal payment method, you can also make certain concessions on price to attract customers.

(2) Pretend difficulties to gain sympathy.

Common reasons: Recently, the factory (or branch/new workshop/new production line/invested in new equipment)...

A more impressive reason: The company recently won a large government bidding order and has already invested a large amount of funds, so we can offer an additional 3% discount to customers who accept T/T 50% payment method.

We are indeed in a difficult period now and hope to gain your understanding and support! Pretending difficulties to gain sympathy works on many customers.

(3) Advance delivery time.

For example: If the customer wants to do L/C, but you only want to do T/T. You can first test the waters by telling the customer that it is the peak season, and we receive customer orders almost every day. If we do T/T, the funds will arrive faster, and we can ensure earlier production and relatively earlier delivery.

(4) Industry benchmark customer method.

When bargaining, foreign trade salespeople often encounter situations where customers say our prices are high and send a PI from another supplier with a much lower price.

As the saying goes, it is not polite to come without a gift. In fact, whether discussing payment methods or prices, when a stalemate occurs, this method can also be tried, as the advantage is: it either works quickly or it doesn't work.