The increasing number of cancellations and defaults is leading many suppliers in China to protect themselves from potential losses.
The financial contraction in global markets is pushing an increasing number of Chinese exporters to demand risk-free payment methods or apply for credit insurance. The latter is gaining ground, especially for suppliers of high-value products.
Many small and medium operations now specify TT as their preferred payment method. Compared to an L / C, TT is the fastest and safest option for exporters. With this method, manufacturers ship products only after the money has been credited to their bank accounts.
Small appliance manufacturer Foshan Shunde Qifei Electric Co. Ltd and freezer producer Foshan Shunde Weili Kitchen Equipment Co. Ltd accept only TT as payment.
True, TT is only completely risk-free for manufacturers. On the buyers side, it requires confidence that your suppliers will deliver on time and follow specifications. This is not a possibility that most customers are willing to take and companies that refuse to accept other forms of payment inadvertently limit their export opportunities. Some companies, however, allow mixed modes, receiving 50 percent or less of the total purchase price through TT.
Larger manufacturers generally accept various types of payment methods, including through an L / C or an O / A. In such cases, many also purchase export credit insurance to offset risk, including non-payment. . Like international credit rating companies like Moody’s, China has a number of watchdog organizations that analyze the risk of doing business with different countries. Among them are Dagong and China Export & Credit Insurance Corp. (Sinosure). It is these credit reports that large companies look at to determine whether or not to secure an order.
Home appliance maker Guangdong Galanz Enterprise Group Co. Ltd buys short-term export credit insurance for all orders to be paid via O / A and for some L / C transactions. This turned out to be a worthwhile investment because the company was able to receive compensation from Sinosure for two cases of default by an EU customer. The whole process took no more than three months.
Breathalyzer manufacturer Henan Hanwei Electronics Co. Ltd, on the other hand, assesses a customer’s credit history and ability to pay before securing an order. Among the factors analyzed is the credit rating of the country where the buyer is located and whether the client tends to request extensions of the payment term. Although the company has purchased credit insurance for some orders, so far none of its customers have defaulted on their payments.
Shenzhen Dotcom Home Goods Products Exporter of Carpets & Rugs Co. Ltd tries to gauge from email communications and business meetings whether credit insurance is needed for a particular buyer’s order or not. The company has not yet secured any orders.
But the growing number of defaults, which occurred first as a result of the global economic downturn and now due to the current debt crisis in the EU, is encouraging more suppliers to apply for export credit insurance. This is particularly true for those offering high-value products.
Sun Fenix Intl Trading Co. Ltd burned down once. Your South American client drafted an L / C, but the issuing bank later closed, so Sun Fenix was unable to receive payment. The company was able to sell the appliance order to other customers.
Shenzhen Hali-Power Industrial Co. Ltd, a manufacturer of battery packs for digital products, plans to purchase credit insurance for orders exceeding $ 100,000. Transactions below that amount must be settled through TT.
Export credit insurance
The amount a supplier will pay to secure an order depends on several factors, including the credit rating of the destination country, the payment terms, the total purchase price, the duration and the credit status of the buyer. There is no hard and fast rule, but most manufacturers will include a portion of the insurance fees in the transaction value if the cost is too high.
Once the exporter’s sales team discovers that a customer is unable to pay for an insured order, the insurance company is informed so that it can carry out its own investigation before the claims can be resolved.
During the first half of 2010, total purchases of short-term export credit insurance increased 180 percent year-on-year to $ 67.62 billion. Premiums for high-value products in the same period amounted to $ 14,840 million.
To expand its reach, Sinosure recently launched new policies that can provide comprehensive insurance coverage even for small and medium-sized operations. The company mainly offers export credit insurance for national trade and for the short, medium and long term.