Online Sourcing - Take Precautions

In the past few years, the development of online B2B platforms has made international trade much easier. Today, buyers from all over the world just need a few clicks of the mouse to find suppliers through these websites.

The most famous Chinese B2B websites in this field are alibaba.com, made-in-china.com and globalsources.com. As with any other online marketplace it is impossible to completely avoid fraud in these websites.

Alibaba was recently in the news when the company confessed that a group of its employees had assisted some Chinese suppliers to commit fraud. Therefore more and more caution is required while searching for suppliers online. Knowing the type of fraud you can encounter on these websites helps. Like other online marketplaces, it can be possible to register a company name in sourcing websites without having a legal business license. Therefore, you should carefully check the information of companies before getting involved in any business relationship. Two important legal documents are the business registration and the export license of the companies. These need verification.

For this matter, external audit companies based in China could be used, because it would be very difficult for foreign buyers to check Chinese legal documents.

Another point that can be difficult to verify is the nature of the companies that are registered in online sourcing websites. Most of overseas buyers prefer to find direct manufacturers instead of trading companies in order to decrease product prices for their purchases. For this reason, some trading companies introduce themselves as manufacturers. Besides the honesty factor, the risk of doing business with this type of company means having less guarantee for your purchases and less control over the quality of your products.

The production capacity of a manufacturer is another factor that is difficult to verify without an audit. Therefore in case buyers need specific machines or manufacturing procedures for their products, it could be risky to rely only on the information that can be found online. The risk for buyers in this case could be a longer lead time and a lower quality than expected. The impact of this issue is related to the complexity of the production and you should verify the manufacturing capacity of your Chinese partner before starting processing.

Another factor that you should be cautioned about while sourcing online, concerns the product certifications. In most countries importation of some products requires specific certifications. Buyers should first of all check what types of certificates are required in their countries and then check with their suppliers if they can provide those. It is important to know that if some suppliers do not have specific certificates, they could apply for it, however the procedure often takes at least one month. In case your supplier can provide the required certificates it is important to verify them.

The risk of doing business with a company that committed fraud is financial losses. Therefore in order to limit this risk you should pay attention to the payment terms. One of the safest financial operations in international trade that protects both buyer and supplier is letter of credit (LC). Since this operation takes place between the banks of supplier and buyer, there is more security provided. However in case the cost of LC is too high in some countries or buyers are not familiar with LC operations, another option is cash transfer payment terms (also called T/T). In this case it is important to divide the payment into sections. The usual term is payment of 30 percent of the total purchase amount when the buyer places an order and the rest is paid when the cargo is shipped out.

Online sourcing websites could be considered as ideal tools for foreign buyers to find suppliers in China, but remember to take the proper precautions to avoid financial risks.

Column prepared by Milad Nouri, Managing Director,

China Consultants International Limited

www.china-consultants.biz