The increasing number of cancellations and non-payment cases is leading many suppliers in China to protect themselves from possible losses.

Financial tightening in global markets is pushing an increasing number of exporters from China to apply for risk-free payment methods or apply for credit insurance. The latter is gaining ground particularly for providers of high-value products.

Many small and medium-sized operations now specify TT as their preferred mode of payment. Compared to L/C, TT is the faster and safer option for exporters. With this method, manufacturers ship products only after the money has been credited to their bank accounts.

Foshan Shunde Qifei Electric Co. Ltd, small home appliance manufacturer and Foshan Shunde Weili Kitchen Equipment Co. Ltd, freezer manufacturer accept only TT as payment method.

It is true that TT is only completely risk-free for manufacturers. On the part of buyers, it requires confidence that their suppliers will deliver on time and follow specifications. This is not a chance 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 via TT.

Larger manufacturers often accept various types of payment methods, including through L/C or O/A. In such cases, many also purchase export credit insurance to offset the risk, including non-payment. Like international credit rating firms like Moody’s, China has a number of watchdog organizations that look at the risk of doing business with different countries. They include Dagong and China Export & Credit Insurance Corp. (Sinosure). It is these credit reports that large companies analyze to determine whether or not to secure an order.

Guangdong home appliance manufacturer Galanz Enterprise Group Co. Ltd purchases short-term export credit insurance for all orders to be paid via O/A and some L/C transactions. This turned out to be a valuable investment because the company was able to receive compensation from Sinosure for two cases of non-payment by an EU customer. The whole process took no more than three months.

Breathalyzer maker 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 it analyzes is the credit rating of the country where the buyer is located and whether the client tends to request extensions in payment terms. Although the company has purchased credit insurance for some orders, so far none of its customers have defaulted on their payments.

Carpet and rug exporter Shenzhen Dotcom Houseware Products Co. Ltd tries to assess from email communications and business meetings whether or not credit insurance is needed for a particular buyer’s order. 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 ongoing debt crisis in the EU, is encouraging more suppliers to apply for export credit insurance. This is particularly true for those who offer high-value products.

Sun Fenix ​​​​​​Intl Trading Co. Ltd once burned down. Their South American client drew up an L/C, but the issuing bank later went out of business, 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 over $100,000. Transactions below that amount must be settled via TT.

Export credit insurance

The amount a supplier will pay to insure an order depends on a number of factors, including the destination country’s credit rating, payment terms, total purchase price, 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 notified to conduct its own investigation before claims can be resolved.

During the first half of 2010, total purchases of short-term export credit insurance rose 180 percent year-on-year to $67.62 billion. Premiums for high value products in the same period totaled $14.840 million.

To broaden its reach, Sinosure recently launched new policies that can provide comprehensive insurance coverage even for small and medium-sized operations. The company mainly offers short, medium and long term domestic trade and export credit insurance.