I’ll tell you, importing from China is not a business for the faint of heart. You have to have a little gut on you. There are basically two ways that money is sent to China: letters of credit and
Letters Of Credit
This is a simple document where you go to your bank or a bank that does letters of credit. It has to be a credible bank that is known in China. If you’re at the Bank of Schlockdaw, Mississippi, they might not be willing to take a letter of credit from you, but any national bank: Chase Bank, Citicorp, Wells Fargo, any of those guys.
If you are an incredibly creditworthy individual with tons of assets and the banker is in love with you, then perhaps they will give you a letter of credit to let you go buy goods in China without putting up money. I have never had that particular experience.
Typically what you do is you go in and say, “I want to buy a container of products that is $30,000 and I need a letter of credit for $30,000.” Your banker will say, “That’s fantastic. I’m happy to do it. All I need is $30,000.” They’ll put the $30,000 into an account that you don’t have control of anymore, although the money is still there in your local bank. They’ll issue the letter of credit to the factory and the factory will take it to a Chinese bank and that bank will give them a loan on your letter of credit so they get the money to buy the raw materials to build your order. They will build your order and it will ship to the United States.
When the order gets to the States you can’t open the container until the documents have been released to you to open the container and take ownership of it. The letter of credit has to transfer at that time. The container lands in the States, the letter of credit transfers and is converted to cash, and the factory in China gets their money and you have your merchandise. It’s sort of like an escrow service, for lack of a better term. You still haven’t opened that container yet. It could be filled with marshmallows, but for the most part it’s not. They would be committing a pretty big fraud against their bank at home in China and all of that. It’s not going to happen.
Time Of Transfer Payments
In truth, the first way is for chickens! For what it’s worth, the second way is the way I do all my business in China. As a matter of fact, almost everybody I know that does business in China does business this way now. It’s called TT Payments: Time of Transfer Payments. That means that I’m going to wire some money to a cat in China and hope that he sends me something.
If you’re wondering why you would want to do that, there is an inherent reason: they make it advantageous for you to do that. Why wouldn’t they? What they do is allow you to have terms at that point. Let’s say you’re buying that same $30,000 container of equipment. You would TT or wire transfer the money, the factory or the broker – and I don’t like dealing with brokers because I trust the factories more than I trust the brokers – $10,000. They’re going to take that $10,000 and go buy the raw materials to make your stuff. That’s why I know how much money they have in it. They’ll take the $10,000 and start building your product.
When it’s built, they load it on the container in China, put the lock on and seal it, and the document is created that it is coming to the States, and at that point you’re required to send them another third, another $10,000. You’re sending them $10,000 today, and if they perform in the proper time another $10,000 in 20 days. I like this form a lot better because they don’t get all the money up front. They’re not as slow. They want the next $10,000 so they’ll hurry up and get the order made. Then the order is on the ocean on its way to the US or Canada or Australia or Europe or wherever you are. It’s on the ship coming to you. While it’s on the ship coming to you the vessel company has your documents. When the container arrives at your port it’s frozen until you have the documents to go take possession of the container: the original bill of lading.
In order to get your documents released you’re going to have to pay the final payment of $10,000. At that point the shipping company will release your documents and the container is yours. You still have to deal with customs. I’ve had one container of goods inspected by customs. It’s not really a big deal. That’s the way that most people buy. After you’ve established some purchases with Chinese factories, a lot of times you can start negotiating those credit terms.
I have good friends that have 30-day net terms from time of landing in the United States. It depends on how big a percentage that Chinese factory’s business you become. They will do anything they can to keep you as a customer. They won’t do so much to get you as a customer. They’re more interested in keeping their customers, keeping their customer base, and keeping their turnover up.
Chinese factories don’t make any money through the year. Most of them don’t work on much of a profit. What they do is at the end of the year for every dollar of merchandise that they sell, the owner of the factory gets a rebate from the government. It’s anywhere from eight to 15% of his total gross sales. They don’t really care a whole lot about how much money they made selling to you. They care a whole lot more about how much volume they do. That’s the reason that their export business is so robust. They reward their factories and their companies for exporting. They know import dollars coming in is what will make their economy grow like a weed. That is the reason for the mentality they have. They’re really interested in volume and if you’re producing volume with them it is really easy to go back and negotiate further terms.
One more codicil for you if you get really big in the importing business: if you have a licensed Chinese company like a Hong Kong trading company, or a Shanghai trading company, you can get a rebate from the government for your own exporting. In other words, you would buy your products domestically by having your Chinese company buy the products domestically in China and you pay the price the factory wants. When you export the goods out of China to the States you can apply for those government rebates at the end of the year. If you’re doing millions of dollars in exporting a year and importing a year, it’s really worth doing though there is quite a bit of paperwork involved. It’s for an advanced importer.
If you’re savvy enough sometimes you can find trade partners. If you can find a broker or agents almost all of them are set up with these rebates and it is another way they are making money on you. Tell the agent, “Tell you what. I would like to use you but let’s split the rebates.” At first they’re going to say, “I don’t know what you’re talking about. What do you mean rebates?”
The way it works in China is when you go to manufacture something, every time you buy a part or raw material the factory pays sales tax on it. We don’t do that in the States. Over there they all pay sales tax on that stuff when they build the product. When they go to sell it, basically the money they are getting back from the government is money they paid in. If they export those good out of China they get a refund for 100% of all of that tax. If they sell it domestically they don’t get that refund, but the trading company does. The trading company can export and then get the refund for eight to 15% of the full-face amount. That’s a big deal.
If you’re dealing with an agent say, “Hey, look. Why don’t you split the VATs with me? Let’s split the VATs. If you want my business you’ll split VATs with me.” A lot of times they will. I didn’t get that little piece of data right there until I had been to China at least six or seven times. This could save you tens of thousands of dollars, or even millions of dollars over time if you’re a big importer.