Foreign Suppliers - Why a Letter of Credit is a Good Idea

I recently read an article in Business Week that talked about how factories in China were closing, and just how messy those closings were. Many suppliers were left unpaid. Clients were left without product.....

This brings me to a point of doing business in a foreign land. Most of my purchase order financing have foreign suppliers. These suppliers usually demand payment in cash - however we always insist on paying with a Letter of Credit. Why? Well, it's not because we are unreasonable. It's because we want to engage in a protected transaction (our client is protected) in which the supplier is guaranteed a payment - only if they deliver: in time and in the right quality/quantity. It protects the supplier (they get paid), and the client (they get the product).

By the way - and this is just a personal thought - I am always suspicious of a supplier who is unwilling to accept a letter of credit for a large order. In my opinion, it's a red flag and it can mean that they are in trouble and they need money themselves.

Now imagine the worst case scenario - you send an advance - say 50%, and then your supplier dissapears. Now what? Travel to abroad and try to collect? Not likely. That is where a Letter of Credit protects you - and why we insist that our purchase order financing clients use them.

Even with things as complex as they are - temember that purchase order financing is a very flexible form of business financing that is still easier to get than a business loan.



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