Background
For a North American business that plans to sell to the Chinese market, the importance of receiving sufficient payment from the importer cannot be overstated. Regardless of how favourable the deal may seem, failure to receive payment can make or break the deal entirely. Therefore, it's crucial to be aware of potential "Red Flags" that may indicate an importer payment default. By using these red flags to protect yourself, you can increase your chances of succeeding in the China market.
Red Flag 1 - Refusing or unable to give any upfront payment
Having a reasonable percentage of upfront payment helps to prove the good faith and payment ability of the Chinese side. This is especially true under the current climate in which the Chinese government is tightening up foreign exchange controls.
It is prudent to require a meaningful amount of upfront payment and make clear in your contract that you will not begin work until you receive it.
It is better that you learn early on whether the Chinese importer will be able to pay you rather than later.
Red Flag 2: Insisting on receiving delivery before the final payment
It is common practice in China for importers to insist on withholding some amount of final payment until delivery is complete.
From the point of view of the exporter, it is best for all payments to be received prior to delivery, and if the Chinese importer agrees, this is ideal. If not, consider adding a 10% payment as a final “almost bonus payment” due after delivery.
In other words, you may want to consider increasing your total contract value as a risk reduction measure for a potentially untrustworthy company.
Red Flag 3: Insisting on you paying for an upfront inspection cost of importation
It might seem like an odd requirement, but it indeed happens that an “importer” may request an upfront payment of the customs inspection fee. This fee may be a condition for the importer to import a “very large” quantity of products from you because “it is part of their compliance requirement.” To make it more appealing, they may promise you a minimum amount of importation for the years to come.
As a rule of thumb, importers should bear the cost of customs inspection or quarantine in connection with their importation. If you receive a request to pay a “small” inspection fee upfront, this is a red flag that it is likely a scam.
Red Flag 4: Requesting a prototype but not being willing to pay for it
Scam “importers” may ask you to ship your product prototypes or samples first but not be willing to pay for them. As always, they may claim to have “legitimate” reasons for not doing so. For example, they may say that they need to see if such products are fit for the Chinese market. They will also “promise” you they will import a very large quantity after they have done preliminary but necessary market studies.
However, you should avoid doing business with someone who does not pay a fair price for what they get.
Red Flag 5: Being Named as an “Untrustworthy” Individual in a Court Order
This is a situation when the importer or its controlling shareholder is named as an “untrustworthy” individual or company according to a Chinese court order.
As of today, there are over 7 million “untrustworthy” individuals recorded in the Chinese judicial system. These are the people who have failed to pay outstanding debts even after they have received a court order.
If an importer or its controlling shareholder is found in this system, it is definitely a red flag.
Conclusion
While China’s huge market can present a wealth of opportunities, it is essential to take time to assess the potential importers’ legitimacy, credibility and ability to make payments. In addition, having unambiguous and clear payment terms drafted by a lawyer with first-hand experience in China is essential in avoiding China importers' payment defaults.