Insist on a Bank Account When Paying a First Sample Charge

You’re planning to manufacture a product in China, and a new supplier asks you to pay an initial sample charge. At this stage, you’re focused on ensuring the manufacturer understands your product specifications and quality standards, and the initial sample is an important step in that process.

But if you think of the initial sample only as a means of checking product conformity, you’re missing an opportunity to vet this potential supplier more fully. Indeed, you can use the sample charge as a quick and affordable way to verify the supplier’s identity.

Now, before I continue, I should stress that you must not rely on one method alone to verify a supplier’s identity. For one, you should ask for a copy of the supplier’s business registration and check that the company name and address match the contact information you’ve received from them. The most dubious of would-be suppliers will not reply to your request, which means you can immediately scratch those suppliers from your list of candidates.

Another way to verify the supplier’s physical location is to have your courier pick up the initial sample from their factory. If they send it to you, you’ll have no way of knowing where it came from. But if you ask Fedex or DHL or TNT to pick it up from their building, you can match the collection address to the address on the business registration.

So, after a series of emails, you’ve whittled your initial list down to 2-3 prospects. Depending on your budget, you might ask each manufacturer to produce a sample. Here’s where you use the sample charge to further verify the supplier’s identity.

When invoicing you for the initial sample, a Chinese manufacturer will oftentimes ask you to pay by Western Union or PayPal, because the transaction cost for sending and receiving small sums can be significantly less than a bank transfer. Certainly it makes economic sense to use either of these payment methods, but it’s a wasted opportunity.

Instead, you should insist on paying a new supplier’s initial sample charge by bank transfer. Why? It’s simple: when you wire funds into a bank account, you need the beneficiary’s correct legal name and address.

Chinese banks are generally careful to verify the identity of a person or company when opening a new bank account. PayPal does not verify identity as thoroughly as a Chinese bank, and Western Union payments are generally sent to an individual.

When you pay by either of these two methods, the payment is not doing much to help you verify the supplier’s identity. By contrast, you will know exactly with whom you are dealing when you pay by bank transfer.

This tactic can certainly help weed out fraudsters, but that’s not my primary concern. More interesting is what the name and address of the beneficiary can tell you about the supplier.

You might be surprised to learn that the recipient of your funds is NOT the person or company you have been emailing. I’ve seen all kinds of situations, such as where payments are sent to a parent company, a trading company, or even a manager’s personal bank account.

If a manufacturer claims to have hundreds of employees making products for clients all over the world, yet they ask you to make a payment into someone’s personal bank account, you can be sure they are not who they say they are. At this stage you may wish to scratch them off your list of prospects or send an inspector to perform a factory audit.

Personally I won’t do business with a manufacturer that does not have a company bank account. Period. I don’t care what story the salesperson gives me about how the bank account belongs to the owner’s wife and they are using it to avoid paying taxes. It doesn’t matter, I simply don’t want to deal with them.

Yes, it costs more to wire a sample charge by bank, but the extra cost is well worth it. Once you’ve paid the initial sample charge, by all means use Western Union or PayPal to send funds for a second, third or fourth sample. But always insist on paying an initial sample charge by bank transfer.

It’s a simple point, but you’ll learn a lot from using this tactic. Ultimately it’ll help you weed out less-than-ideal suppliers.

Forward Currency Exchange Contracts for the Small Importer

If you’re importing, chances are you need to buy foreign currency on a regular basis. Naturally this currency exchange becomes yet another risk factor in your business which you must mitigate.

Big businesses have access to exotic systems for managing currency exchange risk, among which is a financial product called the forward currency exchange contract. As a small importer, it is possible in certain situations for you to use this method to manage currency risk, too — but before doing so you should be aware of the facts.

A forward contract is an agreement between you and a currency dealer to purchase a certain quantity of foreign currency at a certain price on a certain date. For example, you might agree to buy 950,000 Japanese yen for 12,195.88 US dollars on November 11th of this year.

Once you enter into this contract, you are obligated to make that purchase when the appointed time comes. If the exchange rate has changed in your favor, you will be losing money. On the other hand, if the rate has gone against you, you will be delighted to have had the wisdom to arrange the forward contract. In that case, you will be getting a better rate than if you had bought the currency in the spot market.

It’s important to understand that a forward contract is not meant for speculative purposes, since it is largely impossible to predict currency exchange fluctuation. Indeed, the purpose of the contract is to remove the need to speculate on where the exchange rate will go.

With a contract rate firmly locked in place, you can focus on more important aspects of your business. You will be able to sleep at night knowing you won’t lose your shirt if the currency markets turn against you.

So where do you go to get a forward contract? A quick search on the Internet might give you the impression that a bank would be the logical place.

Not so. Walk into a bank and ask your banker about forward contracts, and you will be rewarded with a smirk.

The banker knows that a forward contract is for medium and big businesses that are managing millions of dollars. And you’re not part of that club.

Generally speaking, a forward contract is not an appropriate solution for managing currency risk at the small business level. So, before continuing with forward contracts, let me point out two simple ways to manage currency risk without resorting to a forward contract.

First, you can just buy what you need in advance. Let’s say you are about to place an order with a lead time of 90 days and you’re anxious about where the exchange rate might be headed in the interim period. If you have extra cash on hand, you can simply buy what you need in advance and stash it in a bank account for when the final payment is due.

Second, you can price the currency risk into your profit margin. Looking at historical rates, you know that the currency pair has not fluctuated more than 10% over the previous 12 months. If your markup is 100%, you can live with a 10% change in the exchange rate. Chances are very good that it won’t make a move large enough to erase your profits. And, on the upside, you have a 50% chance the rate will move in your favor, thus improving the profitability of your shipment.

So, before going with a forward contract, ask yourself whether simply buying the currency in advance or pricing currency risk into your markup will be sufficient to mitigate currency exchange risk for your business. Both methods are effective when you are dealing with a foreign currency that is relatively stable with respect to your home currency.

Nevertheless, there are contexts when you might need a forward contract. Certainly one of its uses comes when you must make a payment in a currency that fluctuates wildly — say, because of political risks such as war.

Another situation which calls for a forward contract is where your profit stands to be wiped out by an unexpected fluctuation. (If this is the case, you should ask yourself whether it is wise to take this level of risk for such a small potential reward.)

If you find yourself needing a forward contract, by all means use one. But don’t go to the bank asking for one, as you’ll just be rebuffed.

Instead, you can get a forward contract through an online Forex service. These online services are geared to small international traders, and they will be more than happy to sell you a forward contract where a bank would not normally do so.

I’m not going to endorse any particular service. There are many of them out there — just do an Internet search for online forward exchange contracts and you will find what you’re looking for.

An online Forex service is the best way for small businesses to buy a forward contract. They’re also better for spot purchases than a conventional bank as well.

But before you jump in and buy that forward contract, just remember that it is a contract. If the market moves in your favor, you will end up paying more than the spot price.

That’s the price you pay for the peace of mind of a forward contract.

Profit and Loss

Most folks believe that business is all about profit. It’s true that profit is necessary to keep a business going, but it is not sufficient.

A business exists to serve its customers. That’s its primary purpose. Without customers, it wouldn’t exist.

If a business serves its customers well, it results in profit. The key word here is result: profit is not the goal of the business, it is merely the result of the business. In this context, profit represents the contribution that the business has made to the greater good of society.

(Let’s assume there is no fraud, no theft, and no violence. That assumption rules out profits made through the violence of intellectual property.)

Now what is the purpose of this profit? Profit is necessary to continue serving existing customers, but it is also useful for expanding the business in order to serve more people.

Existing customers found value in what the business had to offer, so it is likely that new customers would also benefit from those offerings, too. Profit is necessary to bring those benefits to a greater number of people.

But profit has a twin sister, which we call loss. Profit and loss are two sides of the same coin; you cannot have one without the other.

So that brings us to a second important function of profit: A business must make profits so that it can incur losses, which invariably it must accept.

I cannot stress how important it is for businesses to take losses on behalf of their customers. A business must lose from time to time in order for its customers to live their lives with a modicum of stability.

We live in a world of eternal change — a world of great risk. As individuals, we simply cannot bear all of the dangers which could potentially befall us.

So we entrust much of these risks to the businesses which serve us. When bad things happen, it is the business which takes the hit.

These loss-making activities include such things as assuming the burden of debts, writing off defective merchandise, or operating with a negative cash flow for periods of time. In the worst of cases, the business makes the ultimate sacrifice and declares bankruptcy.

All of these losses are necessary to protect the customer so that he or she can live a life with less worry and anxiety. The business assumes the risk of loss in bad times and, in exchange, the business is allowed to make profit in good times. That’s the contract between business and client.

Loss is not only important for protecting customers, it is also critical for the entrepreneur, since it is the primary means for the entrepreneur to learn and get better. Loss informs, much in the way that life teaches us through hard and bitter experience. Loss tells the entrepreneur what he or she must do (or not do) to survive and thrive in the future.

And this is the great tragedy of the financial crisis. By bailing out the banks and car manufacturers, the US government robbed these businesses of the opportunity to learn, improve and innovate.

Everybody wants to profit; nobody wants to lose. But you cannot have profit without loss, and you need loss today in order to learn the lessons necessary to change and adapt. Loss shows the path to future profitability.

All businesses, large and small, must be allowed to make mistakes and learn. There is no such thing as “too big to learn.” Thus, there is no such thing as “too big to fail.”