Here at SourceJuice we are fortunate to be on the ground in China to get access to local news that will help our readers.  As we reported on our previous article about the Chinese Economic Stimulus Package and the pending Value Added Tax Rebates (VAT) that are coming to promote exports we have now found the official list and items as well as the changes.  As reported on November 17 by the Xinhua (Chinese Government Press) titled “China announces 3,770 items involved in 3rd export tax rebate rise” the VAT changes will take effect December 1, 2008.

BEIJING, Nov. 17 (Xinhua) — China’s Ministry of Finance announced on Monday a list of 3,770 items involved in the third export tax rebate increase this year.

The items include labor-intensive, mechanical and electrical products. New export tax rebate rates on these items were also announced. The change take effect Dec. 1.

The announcement came four days after the State Council, or cabinet, said it would raise export tax rebates for the third time this year as part of the government’s 4-trillion-yuan (571.4 billion U.S. dollars) economic stimulus package.

Rises in tax rebate rates varied among different items. For example, the rate on tires was raised from 5 to 9 percent while glassware was up 5 to 11 percent. Rates on labor-intensive products such as luggage, shoes and umbrellas were elevated from 11 to 13 percent.

The 3,770 items accounted for 27.9 percent of the country’s total exports, according to a statement posted on the government’s website.

The statement said the government would also eliminate export duties on certain types of steel, chemical and grain products and reduce export duties on some fertilizer products, also effective Dec. 1.

China raised export tax rebates in Aug. and at the beginning of this month on a range of goods to shore up flagging exports.

Please see below for the details of the items being impacted from the official press (this was translated from Chinese) announcing the new China Value Added Tax (VAT) changes that will be effective starting December 1, 2008.  When you view this below, please note the second table is the list of actual changes along with the percentages for the items listed.

As a reminder and for those new to Value Added Tax and the benefits for you as an importer in how it can better help you negotiate if not cut costs significantly when you have such knowledge please read our prior post on understanding VAT Rebates to bargain more effectively on SourceJuice.com.

China VAT Changes for December 2008 Press from China’s Government

Ministry of State Administration of Taxation on the improvement of labor-intensive products such as value-added goods, the export tax rebate rate of notification

Document number: 2008 taxation No. 144
Published: November 17, 2008 status: Effective
Taxation [2008] No. 144
Provinces, autonomous regions and municipalities, cities City Department of Finance (Board), the state Revenue Department, the Xinjiang Production and Construction Corps Finance Bureau:

Approval of the State Council decided to raise some of the goods the export tax rebate rate of value-added tax (hereinafter referred to as the tax refund rate).  Answers to the notice of the matter is as follows:

First, raise the tax refund rate range of goods

(A) will be part of the rubber, forest products tax rebate rate from 5% to 9%.

(B) will be part of the mold, glassware tax rebate rate from 5% to 11%.

(C) of aquatic products will be part of the tax rebate rate from 5% to 13%.

(D) the luggage, shoes, hats, umbrellas, furniture, bedding, lamps, clocks, and other goods tax rebate rate from 11% to 13%.

(E) some chemical products, stone, wood processing non-ferrous metal commodities such as the tax rebate rate from 5%, 9% to 11% and 13%.

(F) of machinery and electronic products will be part of the tax rebate rate by 9% to 11%, 11% to 13%, 13% to 14%.

Proposal to raise the tax rebate rate of the specific trade names, and the tax rebate rate in the appendix.

Second, the execution time

Notice of the provisions of the tax rebate rate adjustment since December 1, 2008 from the Executive. The implementation of the specific time in order to “export goods declaration (exclusive of export tax rebates)” Customs indication of the date of export.

Hereby notified.

Annex:  (** Here is the official list in Chinese.)

Ministry of State Administration of Taxation

November 17, 2008

Annex:

Raise the export tax rebate rate of goods list

-The Sourcejuice Team

The Chinese Government just announced on Sunday (November 9, 2008) that a massive economic stimulus package will be introduced to help China and the domestic market continue to keep healthy during the global economic crisis. One of the larger measures will be additional VAT (Value Added Tax) measures to boost trade. Below is a specific excerpt from the official government press that can be found here.

A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake.

The policies include a comprehensive reform in value-added taxes, which would cut industry costs by 120 billion yuan.

As we at SourceJuice find out the details of the VAT (Value Added Tax) changes, we will report on the changes as well as identify the new data that will outline the specific changes and benefits. Once again, to understand what a VAT is and how it can better help you negotiate if not cut costs significantly when you have such knowledge and know how the system works please read our prior post on SourceJuice.com. Go here for that article.

-The Sourcejuice Team

To understand what a VAT is and how it can better help you negotiate if not cut costs significantly when you have such knowledge and know how the system works please read our prior post on SourceJuice.com. Go here for that article.

See below from the Chinese Government’s official media portal about the Government’s changes to the VAT categories mentioned. For the full story and reasons why go here.

BEIJING, Oct. 21 (Xinhua) — China is raising tax rebates for certain exports to help producers cope with smaller profit margins as a result of slacking market demand, the yuan’s appreciation and rising production costs.

Those rebates will start Nov. 1, according to a circular on the web site of the Ministry of Finance (MOF) on Tuesday.

The adjustment involves 3,486 items from labor intensive industries such as textile, garment, toy, hi-tech and high added value sectors like anti-AIDS drugs and tempered glass. Those items account for 25.8 percent of what’s covered by the country’s Customs Tariffs.
The new rebates are classified into six categories: five, nine, 11, 13, 14 and 17 percent.

For example, the export tax rebate for some toys, textiles and garments will be raised to 14 percent. There will be a nine percent rebate for certain plastic products, 11 percent for daily necessities and porcelain artifacts, 11 and 13 percent for some furniture.

According to an unnamed MOF official, the rebates will ease operation pressure for export enterprises and enhance their competitiveness. He added the adjustment would also have a positive impact on the development of the national economy.

Because exporter industries will have more money as a result of the rebate increase, China is hoping they will be able to withstand the world’s financial crisis.

So what’s going to happen in 2009 with the Value Added Tax (VAT)? Here is some insight from a recent story at Law and Tax News that we have heard similar insights from China Customs. Below is an excerpt and for the full story go here.

A tax cut in the shape of a VAT reform, expected to cost up to CNY150bn (USD22bn), has been formulated by the Chinese Finance Ministry and submitted to the Chinese State Council in a bid to stimulate the Chinese economy.

The reform involves the revision of the Provisional Regulations on Value Added Tax (VAT). The VAT law, introduced in 1994, underwent some changes two years ago, but this will be the first major reform of the legislation. Tax officials anticipate the reform could take three months to implement and cost between CNY100bn and CNY150bn in tax revenues.

The reform is aimed at shifting from a production-based VAT regime to a consumption-based system, which is practiced in most countries. The government has already trialed this system in several areas of China, but is now eager to roll the system out nationwide from 2009, not only to advance its tax modernisation agenda, but also to give the corporate and manufacturing sector a timely economic boost amid global economic uncertainty.

The current system means that companies wishing to invest in growth through the purchase of machinery and capital assets are not able to claim VAT deductions on their tax bills. Thus the reforms should encourage more investment in production. Contrary to early speculation, the reform is likely to be applicable in all industries except some restricted by Chinese law. It was previously assumed that the reform would only cover a few specific industries.

The Sourcejuice Team

In analyzing some of the trade commerce trends in China, including the advancement of better quality standards, a new sector of the sourcing market will be geared toward higher-end and more complex products. The manufacturing of recreational boats is but one of these areas for growth that can be adapted to the USA manufacturing and sales business model. This week we will explore some of the challenges faced by integrating an overseas manufacturing model for boats, analysis of costs and margins, Chinese boating industry progress and a leading Shenzhen manufacturer interview and commentary.

Sourcejuice recently had the opportunity to interview the Chairman Director of HSB, Shi Jun, to discuss the factory’s capabilities, industry involvement and recent trends in the market. Shenzhen HiSpeed Boats Tech. & Development  (HSB) is one of the leading boat manufacturing companies in Shenzhen. The company was established over 50 years ago as a state-owned business building ships for the Chinese government. In 1999 the focus changed to the commercial market, converting to a private company.

SOURCEJUICE:  What are the types of marine vessels manufactured at this facility and who are your typical customers?
Shi Jun: HSB specializes in the complete construction of speed boats, sailboats, yachts and semi-military marine vessels. Some of the primary customers are the Chinese Coast Guard, Customs, China Marine Safety Administration (MSA) and recreational boating entheuisists. Most of our customers are from the Chinese domestic market, but through the use of a trading company or entity with an export license, our marine vessels can be exported anywhere in the world.

SOURCEJUICE: What problems might you foresee in exporting boats?
Shi Jun: Unlike some of the typical Chinese exports, marine vessels are a highly complex product. Consider mechanical, hydralic and electric components, taking into account  quality assurance, servicing, maintenance, parts, etc after the customer takes possession.

SOURCEJUICE: If a marine manufacturer was evaluating HSB as a potential supplier, what sets HSB apart from other companies in China?
Shi Jun: We have an established standing in the industry, over 50 years of experience and are head of the Marine Chamber of Commerce here in Shenzhen. HSB leverages its own and joint engineering initiatives with cooperations from Dalian Marine University to stay on the cutting edge. HSB was the first and possibly only manufacturer in China to utilize such high-end materials such as Kevlar and carbon fiber for hull construction. These materials are used on boats traveling at upwards of 70 knots per hour. We are also working with the Shenzhen governement on a yachting and cruise plan for citizens here in Shenzhen to enjoy.

SOURCEJUICE: Do you know of any marine companies already manufacturing in China?
Shi Jun: Brunswick

SOURCEJUICE: What is the comparison in cost from a boat manufactured in the USA vs. China?
Shi Jun: This depends entirely on the type, motor, size, and trim of the boat, however the cost savings can be between 3 and 5 times the cost. It’s an incredible number.

SOURCEJUICE: Which is the most expensive part of the manufacturing process?
Shi Jun: On super-yachts the material and on recreational boats, the labor.

Challenges
Much of the cost associated with the construction of recreational boats is in the labor and raw materials during assembly. Many manufacturers will fabricate the fiberglass hulls state-side and then import all the components, from overseas suppliers, piecing them together in a USA warehouse for later distribution.

There are many challenges to manufacturing an entire boat in China for direct importation into the USA:
•QA testing of the boats prior to distribution
•Service and maintenance
•Weight, size and packaging of boats relative to logistics
•Parts replacement for defective equipment prior to sales

Cost Benefits
Here is the breakdown for cost savings with China domestic manufacturing:
•Assembly cost
•Raw material cost
•Electronics, wires and parts cost

You will of course have some new costs that will affect your landed cost:
•Customs Import Duties
•Logistics Cost

Shipping Boats
This seems like one of the largest obstacles in exporting boats from China. The place is over 10,000 miles away, right? How many companies could there possibly be that can handle shipping boats, yachts, etc across the world? Apparently, there are more than a few! Those in boat sales already know that foreign buyers that have boats shipped back to their home country is a common practice.

Yacht Path Intl - serving 3 continents, they have even developed their own “time-tested cradling system to transport yachts up to 250 metric
tons.”

Complete Freight - these guys look like they can do it all: huge ships dismantled and shipped in pieces, speed boats mounted on top of containers, American Cup sailboat racing, etc. Check out some of the pictures near the end of the article.

According to AutoShippers there are several ways to ship a boat or yacht worldwide:

Flat Rack Shipping The flat rack shipping method utilizes 40ft containers without sides or top. The container is loaded by crane into a cradle at the shipping facility.	Roll on, Roll off Shipping This method is the most common form of logistics for boats and is suitable for marine vessels on trailers. Boats are towed into the ship and stowed below deck. Upon arrival, the boat is towed from within the ship to the port facility.

Container Shipping for Boats
Marine vessels that are small enough can be loaded into a standard 20ft or 40ft shipping container and transported the same as any other container.

It is important to note that these companies are specialized in the care and preparation of shipping boats on a large scale. The same techniques can likely be used with your current forwarding and logistics company.

During my research for this article I did come across some great boats:

Changzhou F.R.P. Shipyard

Changzhou F.R.P. Shipyard

Changzhou F.R.P. Shipyard

… and some incredible ways of shipping them:
CompleteFreight.com

CompleteFreight.com

CompleteFreight.com

CompleteFreight.com

CompleteFreight.com

CompleteFreight.com

Here are some great links which are relative to sourcing entire boats in China.
•InfoMarine Online - complete list of ship building and repair yards in China.
•Yacht Forums - Some discussions about ship builders in Asia.

What are some of the USA import costs for boats?
Here is the section of the Harmonized Tariff Schedule of the United States for the importation of boats of different types.

The Harmonized Tariff Schedule for Boating can be found in its entirety here.

It seems that either for mass production and sales in the USA or the extremely rich custom design, producing boats in China is an applicable options. So who is doing it already? We want to know.

For more information on importing boats from China or HSB, contact us.

dylan@sourcejuice.com // Dylan Blankenship

1. Advance, Cash in Advance or Cash Advance – these are known as payment in advance terms
2. Telegraphic Transfer, Telex Transfer, Bank Wire Transfers – these are known as T/T or TT payment terms
3. Wire and Funds Transfer Services like Western Union and Money Gram
4. Internet payment companies like PayPal.com, Moneybookers.com, and Escrow.com
5. Letter of Credit and the various options that banks offer on these instruments – these are known as LCs, L/C, or LC payment terms
6. Documentary Collections like Documents Against Acceptance or Documents Against Payment – these are known as DA or DP payment terms and sometimes referred to as “Bills of Collection” or “Bills of Exchange”
7. Open Account or Pay Post Receipt or Goods in Advance – When the Seller provides you Credit

As you can see from the above, there are a variety of payment terms and methods that deal with paying Chinese suppliers and the list above is only a sample of the ways that you can pay. However, you should absolutely know the differences of payment terms and methods to insure your financial safety and avoid scammers. The main purpose of this article is to educate those beginning the process of sourcing and importing from China as well as those that are ordering their first sample and have the question – How do I pay safely and what are the methods and terms?

As we review various resources and information from the Internet below, we at SourceJuice.com will present our experiences and opinions. Please note that all of the referenced websites are in English but in the near future we will be including detailed reviews of the payment terms and methods which will be available in your language.

So let’s start with something so important and the heading of this article – How to be safe and avoid being scammed! If it is your first time sourcing and importing from China then this story is one example that may provide you a valuable lesson. Go here to review the story titled “How not to be scammed paying suppliers”. Below is an excerpt from this story and the main point of how securing your ability to get your money back is very crucial.

So to recap, NEVER pay any supplier unsafely without a credit card through Paypal, not even for “small” test orders. I keep saying Paypal because I know of no other service that you can use your credit card with that doesn’t charge your credit card as a cash advance, such as western union does, which means you have NO PROTECTION.

As you can see from the above, there is a lot of pain in international trade when it comes to working with suppliers you never met especially when you are about to make payment to such a person or company that is your supplier. It should be noted that suppliers are concerned (just like you are with getting your product) about getting their money as well and getting paid by buyers they have never seen or done business with. If you haven’t already, take a look at our prior story on how to contact suppliers online here as well as our story on how to avoid getting scammed by using some common sense which can be read here. Not to forget, check out a good article for beginners to importing from China here. In the business of International Trade the key ingredient for successful business is trust – just as in any other business. Hence, the world is filled with so many ways you can pay your Chinese supplier so as to supplement a lack of trust with tools to reduce the amount of financial risk between both parties. So let’s look at all the payment options one by one in summary since we will cover these in detail in later articles. Finally, throughout this article, SourceJuice presents some links from the Internet that offer great insight and experiences on various payment terms, methods, tools and experiences. Please note that for each of these payment terms, there are so many options and unique situations that are different for new buyers to professional buyers. A case in point is that large professional buyers setup terms with their Chinese suppliers to pay in a variety of ways that most of us would not even be allowed unless we were buying in similar volume or had similar credibility (reputation, globally known, great credit and history with the supplier, etc.). Hence, this article is more about the first time buyer in that it acts as a reference guide on the many options to paying their Chinese supplier. For each payment term and method below we will outline what it is, when it is used, and how to be safe. So let’s start.

1. Advance, Cash in Advance or Cash Advance – these are known as payment in advance terms

What is it?
• Seller asks that buyer pays in advance in order to have product or products shipped to buyer. Seller will usually request payment be made using one of the payment methods listed later in this article (like T/T, Western Union, Money Gram, PayPal, etc.).

When is it used?
• Those suppliers that are legitimate and request this type of payment terms generally have either a very unique product (unique, rare, or very cheap) or have a history of electing this method of seeking the buyer to pay in advance of product shipment. Additionally, suppliers who provide custom prototypes or samples may request this payment term before beginning any work. Additionally, many scammers utilize this method and have been known to operate similar to legitimate sellers.

How to be safe?
• Please use common sense! Suppliers only accepting these types of payment terms pose you more risk than others who offer other terms.
• Buyer faces absolute risk when going ahead with this type of payment term. You can lose all the money you send if the supplier happens to be a scammer. It is best to ask the supplier to reconsider other payment terms or just go with a different supplier.
• If the supplier meets certain qualifications you deem necessary for the product and or sample you want to acquire but still only accepts cash advance terms then it really comes down to a buyer decision. It may be in your interest to introduce staggered payments (some in advance and some later) or move the supplier to considering other payment methods that still gets them money in advance but allows you to have some recourse – see PayPal below.

2. Telegraphic Transfer, Telex Transfer, Bank Wire Transfers – these are known as T/T or TT payment terms

What is it?
• T/T is a wire transfer from one bank to another. This can be done via cooperating banks. You must ask your bank if the Chinese supplier’s bank is one that is on their network. Bank of China is usually the bank of choice to wire into when paying your Chinese suppliers. Currently, most western banks will give you a warning that wiring funds to the Bank of China poses some risk. You will need the SWIFT code (an identifier code for all legal banks in the world. All legitimate banks have one) of the Chinese supplier’s bank and exact information to ensure your payment can be executed by your bank. The charge on this usually is $40 USD per wire and note that any large wires, usually greater than $10,000 USD, your bank will most likely report this information to taxing authorities as regulated by the government. In the USA, the IRS is notified when such transfers of $10,000 USD or more are sent.

When is it used?
• T/T is a very common method for buyers paying their Chinese suppliers. It is usually used in trusted relationships (where the buyer has a relationship established with the foreign supplier) or when the supplier requires what are called as prepayment or advance payment T/T. Most credible suppliers will work on a 30% prepayment or advance payment by T/T before shipment of your order and expect 70% payment by T/T after shipment.

How to be safe?
• Buyer assumes almost all risk when using this method. Be careful.
• If you read the story about PayPal above you will note the key to being safe is to have some ability to either get your money back or pay some amount after some event (like receiving paper work or an inspection or when it is shipped) and hold some funds until final receipt of your order. That being said, a T/T for your first order may be risky unless you know your supplier or have some references. In some cases, where you are requesting a sample, this may be the only method. In such a case, negotiating with the supplier for a 30% prepayment and 70% post shipment maybe a good alternative. Going back to the story about PayPal, it may be a better alternative to use PayPal if the supplier allows this – see that section below. Do note that using a T/T is common for buyers and sellers who have developed a relationship but not for first time transactions.
• When sending T/T make sure the account name (at the supplier’s bank) is the same as the company name. Sometimes it may be different but this is a warning sign.
• Being safe using a T/T payment requires trust as do almost all of these payment methods. Research your supplier, negotiate terms or select other payment terms and or methods.

3. Wire and Funds Transfer Services like Western Union and Money Gram

What is it?
• Both Western Union and Money Gram are financial companies that allow individuals and businesses to send money for a fee using electronic wire transfer or other methods such as money order documents, phone payments, and even web payments.

When is it used?
• Usually used by a wide variety of people and businesses for all types of reasons. However, not generally used for legitimate international trade. Please note, it has been our experience and the experience of many that these forms of payment are usually requested by suppliers that are scammers. We have never heard nor experienced any positive experiences being cited by these payment methods.

How to be safe?
• Buyer assumes almost all risk when using this method. Be careful.
• It is not safe. You are absolutely in risk when you pay this way. See for yourself what these companies have to say by going here and here. Once again – Do not pay Chinese suppliers using these services. These services provided by these companies are very good when you absolutely trust the supplier, person, company, friend, etc. In the situation where you are just starting, please do yourself a favor and do not pay your supplier using these services and if they still request you pay this way – leave them for another supplier. Go here and here and here for what others say on this hot topic at the Alibaba forums.

4. Internet payment companies like PayPal.com, Moneybookers.com, and Escrow.com

What is it?
• PayPal.com is an online money transfer company. They are a service for individuals and businesses and act as the financial intermediary between the paying and received parties. You can read more about them here and about user protection here. PayPal is used most often to pay for products on Ebay.com as well as a variety of online ecommerce sites.
• MoneyBookers.com is an online money transfer company similar to PayPal but has a unique and critical difference in that it offers escrow services. From their website they say that

“Moneybookers is a tool that allows you to safely send and receive money via email - instantly. You can send money from your credit/debit card, transfer money to and from your bank account.”

You can read more about their user services here which details the escrow services and merchant services here.
• Escrow.com is a financial intermediary that serves as a 3rd party between a buyer and a seller. From their site the following below describes their services.
Escrow.com, an accredited escrow company, acts as a secure third party to protect the Buyer and Seller.

How Buyers are protected:
•Escrow.com tracks the shipped merchandise and verifies it was delivered.
•The Seller isn’t paid until the Buyer accepts the merchandise, or the inspection period expires.

How Sellers are protected:
•Escrow.com confirms when the Buyer receives merchandise.
•The Seller is authorized to ship only after Escrow.com verifies good funds.

When is it used?
• All of these services are used by many buyers and sellers around the world. The important aspects are in how you want to use these services. Take for example the PayPal story at the beginning of this article where the author of “How not to be scammed paying suppliers” points out that he used his credit card when using PayPal so as to ensure he has the ability to call his credit card company in case of an issue and get his money back. Do your homework when using PayPal since it does not offer that service to all credit cards. Here is a great resource on how to apply the chargeback if you have such a problem – go here to read how to do this.
• Moneybookers.com is relatively newer to most first time buyers, especially those in the USA. However, our personal experience left us pleased with their services. As we noted above, this company provides another layer of assurance with the escrow services it offers. It is absolutely worth your time to educate yourself with their escrow services. Depending on the amount you are about to pay for your first order or sample, it is worth exploring what this company has to offer if not using them where the supplier is both capable and able to be the selling party in the escrow.
• Escrow.com is also very new to many first time buyers. You can get details of how their system works by going here and reviewing all the links on each step of the escrow process. In its simplest form, as noted in a post at Alibaba’s forums that you can find here, using Escrow.com is like T/T but “with one difference. The buyer gets to inspect the goods before they actually pay for them.”

How to be safe?
• PayPal.com → Buyer assumes almost all risk when using this method. Be careful. Only when using a credit card that allows chargeback against PayPal do you have some level of safety.
• Moneybookers.com → Buyer assumes almost all risk when using the direct pay method. Be careful. Only when using the Escrow Services of this company can you share the risk with the seller. Remember, it is up to you as the buyer to make sure you prepare the escrow services in a way you know you are protected to the limit of what such a service provides.
• Escrow.com → Risk is shared between the buyer and the seller. Remember, it is up to you as the buyer to make sure you prepare the escrow services in a way you know you are protected to the limit of what such a service provides.
• In summary, PayPal.com, Moneybookers.com, and Escrow.com provide a variety of options and services. However, in terms of safety the services provided by Moneybookers.com and Escrow.com offer the buyer more advanced tools to manage the financial risk of doing business. The important thing to remember here is that the escrow services require more action and paperwork but also provide additional measures to protect your financial transaction. Which one is better depends on your experience. If you are a US Citizen, it may be better to use Escrow.com since they are based in the USA while Moneybookers.com is based in the UK (United Kingdom).

5. Letter of Credit, Documentary Letters of Credit, Documentary Credits, or Letters of Credit– also known as L/C, LC, LCs

What is it?
In summary an L/C is…

A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.

Thanks to Investopedia.com for this above - go here for this and other information.

• The details? It is best to let a large banking organization explain this. This below is from Barclays Bank in the UK. Please visit their site here for comprehensive information and a thorough overview of this payment term step by step – it is really worth your time to investigate their detailed and informative site. When you get to their site, click on the Features & Benefits link as well as the Key Stages link to get concise information on Letters of Credit. So here is what they have to say on what an L/C is.

Documentary Letters of Credit
A Documentary Letter of Credit (LC) is a written undertaking given by a bank on behalf of an Importer to pay the Exporter a given sum of money within a specified time, providing that the Exporter presents documents which comply with the terms laid down in the Letter of Credit.

Letters of Credit can be for any amount, in any freely traded currency, and, subject to the presentation of compliant documents, may be payable:

• at sight, which means as soon as a compliant set of documents are presented to the paying bank; or,
• after a specified term, e.g. at 30, 60, 90 or 180 days of sight or Bill of Lading date.
• If the documents are not presented exactly as specified in the Letter of Credit, payment will not be made unless the Importer gives their authority to waive or amend the specified condition.

A fundamental principle of Letters of Credit is that banks deal with documents and not with the goods to which the documents refer.

For example, if the Importer is not happy with the quality of the goods but the documents comply with the terms and conditions of the Letter of Credit, the Importer’s bank is obliged to pay the Exporter.
Parties involved in a Letter of Credit transaction
In the process of a Letter of Credit transaction, there are essentially four parties involved. These parties can be referred to by a number of terms, outlined below.
• Buyer meaning Importer, Applicant, Accountee or Accreditor.
In this guide we use the term Importer.
• Seller meaning Exporter or Beneficiary; here we use the term Exporter.
• The Issuing or Opening Bank (Importers Bank)
• The Advising/Confirming Bank - usually a bank in the Exporters country which may or may not be the Exporters Bank.
Types of Letter of Credit

• Revocable - This is an LC that can be cancelled or amended by the applicant or the Opening Bank without prior notice to the Exporter.
• Irrevocable - With an irrevocable Letter of Credit the Issuing Bank gives its irrevocable undertaking to pay if all the terms of the LC are met. The Issuing Bank can only amend or cancel its undertaking if all parties to the LC consent to the change. NB: Although there are two types of Letter of Credit: revocable and irrevocable, LCs dealt with by Barclays are irrevocable. Under UCP600 (Uniform Customs and Practice for Documentary Credits), LCs are assumed to be irrevocable.
• Confirmed - A Confirmed LC is one to which a second bank, usually in the Exporter’s country and at the Exporter’s request, adds its own commitment (confirmation) that payment will be made. Confirmation is generally used when there is perceived to be some risk that the bank issuing the Letter of Credit may not be able to fulfill its obligation to pay. This could be due to bank failure or instability in the country of the Issuing Bank.
• Unconfirmed - If the LC is unconfirmed, the Advising Bank merely informs the Exporter of the terms and conditions of the LC without adding its own undertaking to pay or accept under the terms of the LC.
• Transferable - A Transferable Letter of Credit is one that can be transferred from the first Beneficiary to one or more additional Beneficiaries by the Transferring Bank. It is normally used in situations where a supplier sells through an intermediary or ‘middleman’ to the ultimate Importer and is in a strong enough bargaining position to insist upon payment by Letter of Credit. By using a Transferable Letter of Credit, the intermediary is able to provide payment by LC to their supplier without the need for their own credit line with the transferring bank. An LC is only transferable if it is expressly stated to be so by the Issuing Bank.

• Other - There are other less commonly used variations of Letter of Credit, for example Back-to-Back, Red Clause and Revolving. **see below**

Special Types of letters of Credit
Transferable
Transferable Letters of Credit are used when the Exporter is acting as an intermediary between the Importer and Exporter in a commercial transaction. In this instance, all of the rights and obligations of the LC are transferred from the intermediary to the ultimate supplier. The intermediary has no liability.
The terms of the transferred LC must be the same as the original except for the amount, unit price, expiry date, latest presentation date and period of shipment. All of these may be reduced, or brought forward.
The identities of the Importer and the ultimate supplier may need to be withheld from each other. Careful drafting of the original and transferred Letter of Credit is needed to ensure this occurs. (NB: Barclays assumes no liability or responsibility for any disclosure).

Back-to-Back
In this instance, two LCs are established completely independently of each other. The Importer establishes theirs in the Exporter’s favour. The Exporter can then arrange a second LC in favour of the ultimate supplier of the goods or the supplier of raw materials.

This type of LC should only become necessary where the underlying contracts are on terms which do not match or where a Transferable LC is unable to maintain secrecy on a particular aspect of the transaction.

Due to the greater risk involved with this type of LC, they are rarely issued.

Revolving
If an Exporter makes regular shipments to a particular Importer under a long term supply contract, it may be beneficial for a series of shipments to be secured by a single documentary LC.

A Revolving LC can achieve this by the LC being reinstated for the original amount after a given period, and allowing the value of the LC to be drawn each time a shipment of goods is undertaken.

Be aware that as this is a continuing liability, it will have an impact on banking facilities.

Advance Payments (or Red Clause)
An LC that contains a clause, which authorises the nominated bank to advance a portion of the value of the LC to the Exporter before shipping documents are presented. This enables the Exporter to purchase raw materials or to pay other costs before receiving the full payment, once conforming documents have been presented.

Advances are made at the risk of the Importer. Drawings under an LC are made against a simple receipt from the Exporter that they will refund the amount if they do not ship the goods as required. The Importer’s account is debited as soon as an advance has been made.

Standby
A Standby Letter of Credit is a type of trade debt guarantee that is only drawn against in the event that the Importer defaults in some way, eg. fails to pay for a consignment within an agreed period. A standby LC includes an expiry date, but no latest shipment date. Standby LCs will normally call for a statement of default from the Exporter and also evidence of default. Barclays is happy to discuss whether or not a Standby Letter of Credit is appropriate to your needs.

When is it used?
• Generally an L/C is used when the amount of money exchanging hands between the buyer and seller are significant and the paperwork involved for using the Letter of Credit (L/C) insignificant as well as the cost born in using this payment method. Many buyers argue that L/C is a must to establish trust with a supplier. Others say that when a certain value is reached (some quote that $50,000 USD is a good threshold to gauge when to use an L/C) it is an absolute. However, from our poll of some of our readers, especially those paying for the first time, it all depends on what you are about to source and import. If you are importing some very expensive products (like a boat or a batch of motor bikes) then this becomes a “must review” payment method. But if you are buying a sample MP4 player then this is something you will not even waste the time to review or even inquire about. The general consensus by import buyers is that L/Cs allow some measure of financial risk management to be put into the process of exchanging money for products and that it is a widely used method when the value of such goods is high enough to justify both the costs and the time required to execute on such a method.

How to be safe?
• Risk is shared between the buyer and the seller using such a payment term and method. However, how you prepare and how rigorous you are with the details will do more to protect you than just going into an L/C contract casually. Pay absolute attention to the details since L/Cs require total accuracy. Read below.
• The L/C is a method and tool that enables some amount of financial and buyer and seller risk to be managed by a third party (the banks) but is not absolute in ensuring that their will be no abuse by either sides (the buyer or seller). However, it is a payment term, method, and tool that allows more oversight and pays a third party (the banks) to provide that oversight. While it does not absolutely prevent a buyer or a seller from scamming the other, it does however provide a basis to put a measure of control into the relationship. Using good banks on both sides is critical as well as ensuring the details of the L/C are absolutely reviewed and thoroughly understood by both parties.
• Seek a good bank to review with you the various Letters of Credit and even how to use Documentary Collections (like Documents against Payment – DP; please see below for more details in the Documentary Collections section below) in conjunction with the L/C to offer you more security.
• Be prepared, be knowledgeable, seek a good bank that does a large amount of international business and gain knowledge and experience by reading up so you can be prepared. Here are some excellent sources for background information and experiences that you can put to use in your business dealings.

• A really excellent set of instructions, best practices, and checklists is provided by SITPRO which is an agency that facilitates trade. Go here for a wealth of information on Letters of Credit so you will be prepared and knowledgeable when using this payment method.
• An excellent overview of why Letters of Credit fail can be found at this site called creditguru.com. They explain the 3 most common reasons why they fail: timelines and milestones - not managing your date dependent milestones; discrepancies in the document such as missing a comma or a period in a sentence; and compliance around the documents themselves. Go here for the excellent article.
• Read even more about common defects in the documentation of Letters of Credits by going here to this reference page on Understanding L/Cs by the Credit Research Foundation. See the parts at the end of the page where it talks about common defects as well as tips for exporters (which are tips for you the buyer as well).
• The Credit Research Foundation provides yet more good lessons on common problems with L/Cs. Go here for some very good insight and knowledge.
• For a few more specific examples and extensions to the L/C as well as something (called the Demand Guarantee) similar but stronger and safer (but not widely used by smaller importers), visit the following pages from Investopedia.com
• Sight Letter of Credit requires a more thorough level of verification. Go here to see more details.
• Standby Letter of Credit used to show a buyer’s credit and give the supplier more confidence. Go here to see more details.
• When you want to promise your seller that your funds will clear, you may use what is known as a Fully Funded Documentary Letter of Credit (FFDLC) which is “A written promise of payment provided by a buyer to a seller that is guaranteed to clear by a particular bank”. Go here to see more details.
• The Demand Guarantee payment term and method – which is something more stronger and safer than an L/C but offers protection against non-performance, late performance, and possibly defective performance depending on how it is drafted. Go here for information.
• Go explore some issues that others have on LCs and learn from their experiences. Here are a few great resources from Alibaba’s forums once again.

• Here is a diagram of how an L/C works. Go here
• Here is a post and some discussion on how to formulate the L/C terms. Go here
• If there is an expert on L/Cs at Alibaba’s forums, a man going by the user of “Catalyst” would be it. Go here to find his profile and his answers to a variety of questions on Letters of Credit and more.
• Here is a post on how to verify and confirm an L/C. Pay attention to the response from the user “Ranger” who is a moderator for the forums and has provided some extensive background and experiences on a variety of questions about international trade. Go here. Go here to see all the updates by this “Ranger” user and moderator – it is worth your time.
• Here is some discussion on what you need to get from the supplier when you create an L/C using FOB terms. Go here
• Here is a lengthy discussion on L/C and various issues. This is definitely worth the read to see the various issues and how so many importers and suppliers don’t really understand the full details. Go here
• Here are some tips from a law firm for exporters on how to control the L/C. This is important for the buyer to know as well. Go here
• Some advanced topics
• L/C with Irrevocable at Sight by Payment versus Irrevocable at Sight by Negotiation – go here
• Establishing Back to Back Letters of Credit – go here
• Here is a discussion about how pro forma invoice versus a commercial invoice impact the L/C. Go here
• Dealing with partial shipments on the L/C terms? Go here for some insight.
• L/C and Bank Guarantee compared. Go here

6. Documentary Collections are Documents Against Acceptance or Documents Against Payment – these are known as DA or DP payment terms and sometimes referred to as “Bills of Collection” or “Bills of Exchange”

What is it?
To best describe this payment method, since there are so many explanations on the Internet, we leaned on the website at Wikieducator.org since their explanation best describes the details in a way that is more readily understandable for buyers and sellers rather than bankers. Go here to get a full overview of the explanation as well as additional details on other areas relating to international payment methods. From their site we describe what is it with the following:

Documentary Collections

A documentary collection is a payment mechanism in which a seller uses a bank as his/her “agent” in collecting payment from a buyer located overseas. After shipping the goods, the seller submits a draft (a demand for payment) and the relevant shipping documents to the bank. The draft will include instructions to release the documents to the buyer upon the buyer’s payment or acceptance of the draft. The seller’s bank sends the documents, draft, and collection instructions to a branch or correspondent bank in the buyer’s country. This bank carries out the seller’s collection instructions and, upon receipt of payment from the buyer, remits payment to the seller’s bank for the credit of the seller.

Documentary collection procedures are uncomplicated. After shipping the goods, the exporter submits to the bank:
• Shipping documents, including the bill of lading conveying title to the goods, as well as other documents related to the shipment.
• A draft, also called a bill of exchange, demanding payment from a buyer. Depending on the agreed terms of sale, this may be a sight draft, demanding payment on presentation, or a time draft, demanding payment at some stated future time after presentation or after the bill of lading date.
• Instructions to the bank as to how to handle the transaction. Note that a documentary collection requiring payment before the release of documents may sometimes be transacted without a sight draft. Under cash against documents (CAD) terms, the documents are released to a buyer against receipt of payment. CAD terms are generally used when the government of the importing country requires tax stamps affixed to drafts; by eliminating the draft, both buyer and seller avoid stamp taxes.
• Release documents to a buyer upon payment of the sight draft, which is known as a documents against payment, or D/P collection; or release documents to a buyer upon acceptance of the time draft, a documents against acceptance, or D/A collection.
The seller’s bank, called the remitting bank, sends the documents, draft, and instructions to one of its branches or correspondent banks in the buyer’s country. This bank, called the collecting or presenting bank, contacts the buyer and informs him/her that the documents have arrived and can be obtained when he/she complies with the payment terms, which may be documents against payment or documents against acceptance.


Documents against Acceptance (DA)
A buyer is required to “accept” a seller’s time draft, thus acknowledging obligation to pay at the specific future date. The time of payment occurs at maturity of an accepted time draft, 30, 60 or 90 days after date of acceptance or date of bill of lading.
Documents against Payment (DP)
A buyer is required to pay a seller’s sight draft in order to obtain shipping documents. Payment is made on presentation of the sight draft by a bank to the buyer, usually one or two weeks after shipment. Under D/P terms, the seller, through a bank acting as an agent, is able to retain control of the goods until the buyer pays. Under certain circumstances, such as to meet legal requirements of the importing country or to obtain a government permit for foreign exchange, the buyer will require possession of the documents before payment. The seller should inquire as to the practice in specific countries. Air shipments are often made under documentary bill collections. The buyer, as direct consignee of the non-negotiable air waybill, will be able to take possession of the goods before meeting his/her payment obligations.
Additionally, here are some more resources from the web that defines and describe Documentary Collections:

• Documentary Collection Process – Key Stages by Barclays Bank. Go here.

• Documents against Payment (D/P) flow diagram from the Alibaba forums. Go here

• How does documents against acceptance collection differ from a documents against payment collection? Go here to Gatti & Associates law firm’s excellent resource on international topics.
A few others from Gatti & Associates’ site.

• How many third parties are involved in a documents against payment collection? Go here
• What procedures are involved in a documents against payment collection? Go here
• In what types of situations is a documents against payment collection typically used? Go here
• When will a collecting bank undertake a protest action on behalf of a seller? Go here
• What is the function of a protest action in a documents against payment collection? Go here
• What recourse is available to the seller in the event that a buyer does not honor a sight draft presented under a documents against payment collection? Go here
• Should an exporter who uses a documents against payment collection as a payment method attempt to retain control over the product that has been exported to a foreign buyer until such point that the U.S. exporter receives payment under the documents against payment collection? Go here

• HSBC China Trade Services Overview on Documentary Collections as well as other payment terms, methods, and tools. Go here

When is it used?
• Documentary Collections are usually used between an existing and trustworthy relationship between buyer and supplier. The supplier may use these payment terms to lower the overall transaction cost (compared to other payment terms that have a 3rd party which is the bank in this case) as well as the handling for the buyer that is trusted, that the seller has experience with, and that the seller believes will fulfill the payment obligations. Usually, the supplier will elect to use Documents against Payment which pose less risk than Documents against Acceptance. From a buyer’s standpoint, the documents against acceptance is more preferred for it allows more financial flexibility but since the seller usually retains control of how Documentary Collections are created and executed, the buyer’s agreement to such payment terms is all that is necessary to execute against this payment term. Some major banks will offer loan and or credit facilities to the supplier against the supplier’s documents.

Additionally, here are some more resources from the web that identify when it is used over other payment terms:

• What is the difference between an L/C and D/P or DP (Documents against Payment)? Go here and read the comments from “Catalyst” and “zealotwan” toward the bottom for insight.

• An excellent overview of Documentary Collections and their advantages and disadvantages as well as what is being called a “real life” example. A must read for anyone interested in getting at the details of how these payment terms work. Go here to Credit to Cash Advisor’s site article on international sales transactions.

How to be safe?
• Generally, the buyer is more protected than the seller in this type of payment term and method. Documentary Collections are types of payment terms that are usually between two parties (buyer and supplier) that have had a good relationship of trust. However, there are suppliers who are legitimate that will provide such Documentary Collection terms such as DA or DP (usually DP if any) to new buyers. Many of these suppliers will use what is called documents against payment advised letter of credit where they mix a DP with an L/C to further minimize their risk. Once again, the paramount factor in all of these payment terms and methods is trust or the opposite of such which is generally called risk. The more the supplier trusts you the better the terms and the more you trust the supplier the more flexible you may be in which payment term you are willing to accept or get as your choice. Documentary Collections, in general, offer the buyer more protection and put more of the risk on the seller. See this forum posting at Alibaba where they discuss some of this and the risks born by the supplier and the buyer. Go here and look at the response from user “Catalyst” which is excellent and very detailed.

7. Open Account or Pay Post Receipt or Goods in Advance – When the Seller provides you Credit

What is it?
• Essentially, the supplier extends credit to the buyer. In this payment term and method, the buyer is allowed to make payment (using a bank wire or other agreed upon method or instrument) after the product is received by the buyer. Usually the terms to when the payments are made, how the payments are made, and how to address any issues are identified and agreed upon prior to such a payment term being issued by the supplier. Since the supplier faces absolute risk (this is opposite to the buyer’s cash in advance or cash advance payment noted at the beginning of this article), it is presumed that this type of arrangement is made between trusted parties. By providing the buyer what is essentially credit (short or long term depends on the schedule of when payment will be made by the buyer) financing, the supplier is assuming almost all financial responsibility for the transactions.

When is it used?
• Mostly used in trusted relationships between buyer and seller. Additionally used by large companies (buyers) who require that new suppliers provide such payment terms to be part of their procurement program. Many suppliers have had very bad results using such payment terms even when the buyer maybe a very large multinational company with large financial resources. Buyers the world over desire such payment terms but in reality very few suppliers are willing, or shall we say foolish enough, in today’s world to provide such options.

How to be Safe?
• At SourceJuice we say this – Do not even waste your time if you are just starting to source and import from China and you get a supplier that wants to provide you an Open Account payment term because you are asking for trouble. There are no free meals in international trade and if it seems too good then it is too good to be true. Do not spend time with scammers since they know you better than you might know yourself when