Lets continue. 

You need to get into the mindset that the friendlier you appear, the more chances are there for you to get a better price. And not only price, but better terms of business. 

You want your life to be easy in china, and this starts from embracing their way of thinking and doing. 

For the chinese, eating time is sacred. Like for a muslim , at least once in his lifetime he needs to go to Mecca, for the chinese eating time is sacred. 

They eat like kings and they love it. And they love to see you eating and appreciating food like them. That means you knowing how to eat with chopsticks as well as knowing how to drink beer with them. 

A famous word you cannot go without in china is, CAMPEI. Remember, campei, campei, campei campei ( pronounced CAM-PE-I ). Its like Cheers but with a meaning. It means that you are drinking like a friend. And it is very important that you campei with them since it is a question of honor for them and friendship.  

If you don’t drink beer that’s fine, they wont get offended and youll have to do campei with anything else.But it is wise that you know what they mean when they lift their glass in your direction and say campei to you.  Apart from you enjoying a good glass of cold beer, it will show that you are experienced. 

Hope that helps. 

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Ok, so now you know what are the type of documents and how to pay. Now lets talk about some action. 

You need to know certain golden points in order to give the impression of a professional buyer. 

The first is, leave your ego behind in your office. What they know to be true is true, just agree. You have to remember that the majority of suppliers you will meet are 30 year olds who have had a very socialist / communist , closed eduation. What they have learnt when they were young is true to them.  

To illustrate my point. I remember about 7yrs ago, I was in china during the christmas season, more concretely I was in the sunglasses / lighters city of china, Wenzhou. We got into a discussion with some supplier friends of mine, that was astonishing to me. According to them the new year was on the 30^th of december and not the 31^st of december. 

No matter how many times I would tell them , they would not beliee the fact that it is the 31^st when the new year was to come. And funnily enough, my insistence on the fact was actually infuriating them and they were feeling insulted. It is only natural, if all yoour life they have told you that the world is square, and suddently it is round, you are going to feel quite angry about it, to say the least. 

My point is, just accept what they believe. You are not going to win a prize for being right or wrong, but on the other hand you may become friendlier to your supplier, which means, there are more chances to win on the negotiating table.    

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Lets continue. 

D/A: stands for Documents Against Acceptance.  This can be for 60 ,90 or 120 days. Actually it does not mean anything to have DA for 30 days since that is what it takes for the ship normally to arrive to port and since the whole point of a D/A transaction is to give you payment terms, you can see that it offsets the point. 

Furthermore, it makes more sense to do D/P in the above case since you end up paying less charges. 

D/A in the business circle is commonly known as Death in Advance.In laymans terms, the supplier does the shipment, he sends all original documents to your bank, your bank gives you the documents against the PROMISE that you will pay in the stated time. 

If you don’t pay, the bank cant do anything except for putting you in the black list. Hence your supplier will need to go to the judiciary system to put a case against you. This normally does not happen since it takes too many years. Most probably the seller will end up having to negotiate with you. 

As you can see this is a transaction based on trust. Its as if you were to get payment terms from your supplier but internationally.  

Note that there are heavy charges as well as interest charges involved here. This way of payment is commonly used in south america, africa, and markets where there is a good profit margin to offset the higher costs ( eg africa) or where you need to have a constant rotation of goods and have limited liquidity. 

You can see a flow diagram of the above in the following link: http://www.aibtradefinance.com/tf/ProductDiag2.asp  

The 2 last modes of payment are: 

T/T: stands for telegraphic transfer. Very simple , you send payment thru the bank. Normally the supplier sends you documents after getting the payment. 

Free Documents: as above, but means that the supplier sends you the documents first and then you pay him in the time you both have decided. It is same like D/A but the documents don’t go thru the bank. The supplier sends them directly to your office. Hence there are no charges. 

Of course the latter one is normally done with someone you really trust and I have seen it most in dealings house-to-house, ie where the exporter has sold/sent goods to his own import office in the destination country. 

Hope that helps.

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If we said before that lcs are no longer the preferred way of payment, then you must clearly understand the following forms of payment. 

D/P at Sight : stands for Documents Against Payment. In laymans terms, the supplier does the shipment, he sends all original documents to your bank, your bank gives you the original documents against payment. If you don’t have the original documents then you cannot release the goods from port ( in theory, more on that later ). 

When using D/P terms , it is common for a deposit to be given first by the buyer.The reason for this is that D/P is in the normal busioness circle as Death Postponed.  

Why?? Because once documents arrive, the buyer can always choose not to take the documents and not pay and not take the goods. In this case the supplier will need to find a way to negotiate with the buyer to take the goods, or find another buyer or send the goods to another port,etc,etc. remember at this point the goods are property of the seller. 

Sellers prefer this way since fist they have a  deposit which is normallyh of 20-30% hence it is unlikely for you not to take the goods unless special circumstances, or if you a reprepared to loose it.  

As a matter of fact one of my main suppliers called me up just 3 days ago asking me whether I wanted to take some goods of cookware which he had produced and ready in his factory in china. He was ready to give me 10% discount which was the deposit received from his US buyer. Unfortunately his US buyer has declared bankrupcy and has closed down, so my supplier has the 10% deposit with him. 

From a buyers point of view D/P is good since it gives you some credit terms to pay. Remember that the ship will take about 30 days to arrive your port, hence that is really time you are buying. You are basically playing here with the suppliers money without having to pay for 30 days interest.  

The other advantage of course is that you may decide not to take the goods if for example they arrived late hence you would be loosing only your deposit. 

On a final note I leave you this link where you can find a very good flow diagram of D/P ( though of course, if you need any further help, you do know where I am!! ): 

http://resources.alibaba.com/article/61/Documents_against_Payment_D_P_flow_diagram.htm 

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Before I conclude with lcs ( for now ), you might know that there are different terms involved and types of lcs you may encounter.  

Ill go briefly over the main ones in case you are a little “lost” with the technical lingo: 

Irrevocable : basically means that once the lc is issued it cannot be taken back till it expires 

Payable at sight : basically that (if all terms are met 100%) the payment will be done immediately 

Deferred : basically that (if all terms are met 100%) payment will be made after some time ( you choose, maybe 30 days after, 60 days after,and so on) (note:normally there are interest charges here ) 

Transferable : basically that you (as a buyer) open the lc on your supplier and he can transfer the same lc to his supplier. He can only change the amount and the delivery date. To the end supplier only your suppliers details will appear and not the end buyers. This is a common way of payment where the intermediary supplier does not reveal his source to his buyer, his buyer to his supplier, his margin, and he does not involve his money. 

Back to back: basically the supplier takes your lc as a guarantee, and against this his bank opens a fresh new lc to his supplier. This form of payment is very rare nowdays and I believe only some american banks use it since a little mistake can cause the operation to go wrong. I know in spain most banks refuse to open back to back lcs. 

Having said that, lets encounter the other forms of payment you must be aware of in the next chapter.  

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Ok, so you want to be a smart buyer? 

Here is my pearl of advice.

Always put an Inspection Company Clause in the terms of your LC. 

You cannot imagine the amount of times I have saved myself from loosing money just because of this clause. By the way, I am assuming that you are an honest professional businessman since this clause in itself can be used wrongly to your advantage. 

Putting an inspection clause does 2 things. 

First  of all it makes your supplier note that you will be sending someone to inspect the goods. WHETHER YOU SEND SOMEONE OR NOT IS IRRESPECTIVE. The point is that your supplier will be more likely to produce the goods correctly just because of that fear. 

The second is that it will always give you an upper hand in deciding whether to pay or not in case the goods are wrong. 

Since one of the documents that your supplier will need to present to the bank in order to get payed, will be a signed letter by your inspection company, then this means that he will always be depending on you o your inspector to receive this letter. 

Remember that for your supplier to get payed he will have to fulfill 100% of the terms of the lc. If one of the terms is to present the original duly signed and company chopped letter stating that so and so goods are in good order, then without that he cannot get payed. 

I have posted an example of this clause up in the free resources, please make sure to look it up. 

I cannot stress enough  the times this clause has saved me from disaster, I repeat from disaster. 

Also note a very important point:  the bank IS ONLY CONCERNED WITH THE DOCUMENTS. For the last years I have even been putting one of my old companies as the inspector in the clause. Then what I do, once I know that shipment is all ok, since I have the old stamp and letter head of that company, I make the letter , chop it, sign it and send it to the supplier who then presents it for payment. 

The bank does not know that the inspector is a company that is closed down. They also don’t care.   

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Ok, so buyers have become very smart. 

Yes. The fact is that they chinese manufacturers or staff don’t know how to present documents correctly to the banks for collecting the funds once the shipment is done. 

Suppliers know this, hence the reason for them not to prefer this way of payment. See you got to realise that there are a lot of unprofessional buyers out there. The bank when the documents are presented to them, is trained to look for discrepancies. A discrepancy can be a stupid thing like you misspelling a name, for example instead of spelling “manoj”, u spell it as “manog”.  

Now a stupid spelling mistake can be the reason for the buyers bank saying “hang on a minute, there is a problem here, the seller has not done everything as per directed so I retaing my right to pay”. At this point you got to remember that the goods are already on the way to the buyers destination, hence the seller is in effect at the buyers mercy. 

If they buyer is understanding he will tell the bank to accept the discrepancies, if he is not then the seller will most probably end up having to give a discount for the buyer to tell his bank to pay. 

I know many of you might think that the above is not true, the fact that for a spelling mistake things can go so wrong.  

But this is technically true. Another thing is whether your bank agrees to see this as a discrepancy or not, where the issue comes of how much power you have with your bank. 

When I was living in Hong kong, I would hear many stories from other exporters and suppliers as to the way in which buyers from Dubai ( a major reexport market) would tell their banks to look for discrepancies in the documents so as to get a discount. 

As a matter of fact I would say that in the past 10 yrs of me dealing with lcs, in 95% of them I have encountered discrepancies.  

Just think the power I have had in may hands to decide to pay or not the supplier. And just think why banks always encourage you to pay by lc. If each discrepancy costs you about usd 100 (that’s free money that is going in the banks pocket). 

I hope you understand now the reason why sellers are less and less using this form of payment. 

And don’t worry if you are forced to use lcs. 

Ill show you in the next chapter a technique used by me to have the upper hand in the payment terms, always. 

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Ok, so now you are a “Master” in the type of documentation that you will face. I shall be posting some real examples up so you know how these documents really look like . This will specially help the novice buyers. 

There are different ways of payment you should know about.  

Lets start with The Letter of Credit: Put simply, the buyer and seller decide on the terms of the transaction and as long as the seller complies 100% with these terms, the bank pays on behalf of the buyer. 

The Seller will normally send you the clauses or terms he wants to be specified in the letter of credit. You go to your bank and ask for the letter of credit to be opened under those terms ( which you have already negotiated with your supplier). The bank then opens what would be a “payment guarantee” to your suppliers bank. (you most probaly will  need to put a deposit for the letter of credit depending on your bank.) 

Ok that simply put is what it is all about.  

Now, this used to be the preferred way of payment for suppliers before, since in effect the letter of credit ( or l/c as it is commonly known) acted as a guarantee for them to start production and serve the goods. Also you must understand that before it was a sellers market , ie the buyer needed the goods. Hence even if there was some discrepancy( that is when there is a fault in the documents or when any of the clauses are not met), it was likely for the discrepancy to be sorted out and the payment made. 

If before 99% of transactions where done with L/cs, nowdays I would think that it is only 30% of the overall transactions.  

The reasons are mainly that buyers have become very smart and that there is more of a chance of the seller being in the “buyers hand” in deciding to pay or not.  

Ill explain myself in the next posting.

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