Exporting & Importing Goods/International LC -- payments in tranches?
Hi Richard, this is Hank S who has been answering questions about sourcing and manufacturing in China in this same category as you for years. Now I have a question for you, hope you can help.
I have been sourcing and importing products from China for my clients and employers since 2000, and I've never used an LC. It's always been cash deposits and balance before or after shipping, depending on the relationship with the factory. Now my employer is insisting on using LCs for all our orders going forward. The FOB China purchase value of these orders ranges from $500K to millions of dollars.
The factories we're working with have never used LCs either. They are now checking with their banks to understand the process and costs.
I see that LCs can be written to allow "Partial Shipments". Does that mean partial payments can also be made to the Nominated Bank? Is it possible to structure the LC so that funds are partially released as the factory meets certain milestones, such as successful completion of the tooling? (i.e. prior to even beginning production)
My understanding is that the factory borrows money from their bank against the LC, such as in the form of a line of credit. The thinking behind my question is: the sooner the Nominated (lending) Bank can collect payment, the less it needs to lend to the factory, and the less time those funds need to be lent out (i.e. the lower the cost to the factory). I suppose that, to the extent funds can be released in tranches to the Nominated Bank as the factory meets milestones throughout the course of the project, the factory can reduce their cost of capital. Does this make sense? Or are LC funds ONLY ever released when goods ship?
Thanks in advance for your help!
It's an interesting question.
We have to remember that L/Cs are only tied to paperwork. Partial payment made against partial delivery is easy to document & easy to specify in an L/C, as the paperwork such as invoices & Bills of Lading, ad other documents can clearly state details of the shipment, including quantity.
While it's certainly possible to tie a payment amount to a specific task completion, how would you document it? Would you require an inspection & certification by a third party? As long as something can be documented and terms shown/proven in the paperwork, it's technically possible to put into the L/C terms. However it could prove difficult in practice. Plus the banks used would have to agree to it.