Part 9: Importing from China
Importing from China: The Essential Guide to Trade Finance from China.
Today you will learn:
- The standard cash flow scenario for businesses importing from China.
- What a practical example of that looks like.
- What trade finance options are available to redress you cash flow balance.
We will start by looking at a cash flow example when buying in China using standard payment terms. What is much more exciting though is we will finish by giving you a free guide detailing how to buy on credit from China.
Finding your balance
In theory importing from China looks great and can be very profitable, but like anything good it is not without significant challenges. There are many reasons why businesses succeed or fail when importing from China. In the fail category it is not only things like poor communication, quality or standards - in our experience one of the top problems faced by importers is cash flow. Cash flow is also a key area to balance and some companies just don't get it right. In China, "balance" is a word that is used over and over in every aspect of life. It should be a keyword in your business too, and finding your cash flow balance will open the door to growing your business.
The Standard Scenario Problem
Standard payment terms mean that the importer can often be left with negative cash flow for a period of 6 months and more. Let's take a quick look at an example of the problems with a standard scenario. You place an order with a supplier for USD 100,000 worth of product. As standard the supplier will request 30% deposit on order placement but it is also not unusual for a 50% deposit request. Even if it is you should be able to negotiate 30%. So…
Day 1: Minus 30K
For production times more often than not you will be working off a 30 day lead time. This is how long it will take to produce your goods. Of course again there are exceptions: for smaller items you may get a lead time to 14-20 days or for something like textiles it could be 45 or even 60 days. Let's stay standard and work with 30 days.
Day 31: Still down 30K
All going well your goods will ship out of a port in China probably 40 days after you make a deposit since realistically you will be dealing with a couple of "lost days" due to banking, product inspection and awaiting your sailing date. Wherever you are in the world your shipping time will vary slightly but again, taking that stock standard scenario work with 30 days.
Day 40: Still down 30K plus some expenses
The 70% balance term is most likely to be payment due upon the supplier presenting you with a copy of the bill of lading document. This document importantly tells you the date of when your goods are on board the ship. It can be issued a couple of days after this happens and then you are due to pay the balance. In reality you don't really have to pay until the ship is about 7 days from your port to enable you to get a telex release of the original bill of lading. You must have this to clear customs. In the interest of being organized let's say you pay in the middle, i.e. 15 days after the ship sails.
Day 55: Minus 100K and some change no doubt
Let's say your goods dock Day 70 and you get them to your location by Day 75, it's time to start getting them out the door to your valued customers. At this point you really want to be getting some cash back in your pocket. Is it that easy? We have to assume that for some long term clients you offer a measure of credit.
Day 75: Still down 100K+
If you're offering some leeway to your clients then it is most likely to be a standard 30 days. We haven't even spoke about the fact that half or more of the stock is just that and could be in your warehouse for 60-90 days. At best on Day 75 you're getting some cash back in, but sticking to the standard scenario you're probably looking at Day 105+ when you start balancing the books.
The outcome of the standard scenario can look like this:
Day 105+: Down 100K+ but starting to get some cash back in.
Day 165 – 195: Finally clearing all stock and being paid so that you end up with a profit.
So what are much better alternative for me?
Many experienced businesses importing from China are using one or more of the following for credit buying from China:
- Factory Supply Agreements
- One Touch via Alibaba
- China EXIM Bank
- International Trade Finance Co.'s
- Logistics Companies