Your small business is growing and you’ve made the decision to source product directly from a manufacturer in China. This is typically an economic decision based on a comparison of volumes and price points and is made by thousands of new businesses every year. As a result, China quickly becomes the critical backbone to many small U.S. business owners.
Your sourced product is manufactured thousands of miles away across multiple time zones. There are language barriers. Purchases are transacted in a foreign currency. Your product will travel great distances. Who safeguards your product during production and while in transit? How will you pay your supplier – in US dollars or the Chinese Yuan? How will you move your money around the world? You quickly realize you are not in Kansas anymore …
Here are 3 key factors small business owners need to consider when importing from China:
1) You are the manufacturer’s bank
In China, be prepared to prepay for your product before manufacturing can begin. Typically, the Chinese manufacturer cannot obtain bank financing. You, therefore, will have to be his bank. So, if you are going to be a bank, you should be compensated. Be certain to negotiate a prepayment discount or, even better, negotiate a guaranteed payment facilitated by your bank directly to his bank, in lieu of prepayment. Such an arrangement, called an irrevocable letter of credit, is the accepted payment method around the world and protects both you and your supplier, clearly stating such terms as when title to the manufactured product passes.
2) Understand who owns the tooling
To manufacture your product, there is typically proprietary tooling required. Tooling can be quite expensive and will be controlled and housed by your Chinese supplier. Establish the ownership, insurability and accessibility to your tooling and molds. After all, you are paying for them. Your goals should be to have clear title to your tools so you can properly insure them from loss and to have the right to access and even remove your tooling from the supplier’s premises. Additionally, always ask for the option to spread your tooling cost over your first full production run, subject to your quality control approval.
3) Use an experienced freight forwarder
Once manufacturing is complete, your product will need to travel from your supplier’s facility, through several ports of entry and across sea and land. The only way to successfully make this journey “from dock to door” is with the aid of an experienced freight forwarder with knowledge of your particular industry and your particular port of entry. Your freight forwarder is your best friend - a critical partner who oversees document preparation, regulations, transportation, shipping, insurance, and the clearance of your product through customs. Picking the right freight forwarder can mean the difference between the timely arrival of your product and delays which can last weeks or months.
Contact EDGe Business Planning for more information on this topic or for any of your small business financial needs. We offer simple plans to help small businesses breakthrough from financial survival to financial success.