One of the riskiest steps in launching a product business is paying suppliers. What if they make a mistake with the order? What if they are not a real factory?
Follow our top tips to reduce your risk!
Tip 1 Start Small
When you’re first starting out dealing with overseas suppliers, it may be difficult to spot which ones are great and which ones are unreliable.
Over time you’ll know almost instantly if a factory is worth dealing with. When it comes to payments, especially to international suppliers, there are many scam artists because there’s so much money involved.
If they persuade you to send them a deposit and they disappear with the money, just by posting a few listings and a few emails they could make tens of thousands of dollars. That’s why it’s essential you verify the background of whoever you’re making payments to.
Try to start with a small order to test their reliability and quality.
Tips 2 and 3 Background Check
The quickest and fastest way to do a rough background check is using the following 3 tactics of the ABC method.
Step A: Ask for their full address in English and Local Language as well as their company name and incorporation certificate.
Search their company name and later their address on Google and skim through the results. If the factory claims to be a silicon specialist but their website has many different kinds of products from toys to wooden goods, they are probably a trader or someone who has put up a fake website to try to get business, or even a scammer.
Buy from the experts. If you’re buying a wooden item only buy from someone who is a specialist in this area. You’ll know that from their website, their product range and their knowledge when communicating with you via email.
Avoiding traders and doing a quick check of the website on Google is a great way to filter out bad suppliers and potential scammers.
Step B: Ask for references from 3 to 5 customers.
These can be in our countries, such as the UK, Germany or France. Any serious supplier will have customers across the globe and should be able to provide you with 3 references. Call or email them and ask them about their experience with that factory.
Also Google search the brands they give you as references. If they are mid-market to high-end brands the factory should be able to produce products to a good standard.
Step C: Visit the factory address or ask your agent to conduct a surprise visit.
I’ve been given factory addresses and when I showed up it turned out that it was just two guys in an apartment pretending to be a factory. Before you place any purchase order, you or your representative should always visit the factory.
Tip 4 Deposit
Normally factories ask for a 30% deposit when the order is placed and 70% balance payment before shipment.
This is standard across Asia, especially China and Hong Kong. If the supplier asks for more deposit, be very wary. It’s hard to get that deposit back if you later cancel the order or if the factory cannot make the goods to your standard.
They will claim they spent on materials already, so you’ll never see it again. That’s why you have to do as much due diligence before placing any orders as possible.
Tip 5 Escrow
One way to minimize payment risk is to use an escrow service.
The payment from escrow is only released when the quality of goods has been checked and verified. If possible add to your contract that a third party inspection done by SGS or Intertek has to be conducted and passed before the payment is released.
This goes some way to protecting you and ensuring that your product is in good condition before leaving the factory.
Tip 6 Other Payment Types
Larger businesses use letters of credit or TT payments for their orders.
A letter of credit is issued by your bank and tells the supplier’s bank that you have the cash to pay for the order and that your bank has set it aside, much like a certificate of deposit. The funds are released to the supplier only when they meet the conditions of the letter of credit.
Usually this includes passing inspection and presenting your bank with the shipping documents. This service is very expensive and your order needs to be $10,000 or more before it make senses to use this kind of payment.
Most suppliers will refuse a letter of credit for the first couple of orders because they want to use the cash to buy the materials. The alternative payment method is to send the deposit by telegraphic transfer directly to the factory’s bank.
This is the riskiest payment form because you are transferring the cash directly without any terms attached.
Tip 7 Credit
As you build your relationship with suppliers, ask for extended payment terms.
Since manufacturing is so capital intensive, it’s rare for factories to extend lengthy time frames for you to pay. You might be able to push for payment on delivery into your Amazon warehouse.
After two or three orders, ask the factory if you can pay 30 days after delivery. Ask for more than you expect them to agree to, because if you settle somewhere in the middle the terms will still be in your favor.