Running a product based business? Amazon FBA or traditional trading, payment solutions and cash flow are critical components of a successful operation. Today we’ll tackle a few tools and tactics used by many.
The Cash Flow Issue For Product Based Businesses
Let’s discuss cash flow. Cash in any business is key, but especially essential in an inventory based business. You need inventory in order to make sales. If you’re out of stock, you’re out of luck (unless you’re running a crowdfunding campaign, cha-ching!).
So it is essential to be able to have money in the bank to pay deposits and final payments to suppliers in order to ensure your supply chain is on time and your customers are getting their products.
The issues come up with bank fees, currency controls, and just overall fear of money getting lost or stolen in the process. Today we’ll dig into some of the ways to mitigate it.
International Bank Wire – The “Good Old Fashioned Way
Most likely, your first payment to a factory will be by bank wire. Go down to your local bank (or, if they are high tech, allow you to do them online) and fill out the Chinese company name, SWIFT code, bank account, and address (if required). Normally this costs in the range of $35 to $55 USD fixed per transaction. Yes, this sounds like a lot, but if you are doing an order of $10,000 USD and 2 payments – that is $110 USD total, for a percentage fee of 1.1% – much less than Paypal or credit card payment.
While no one likes paying bank fees, this is a clear cut, tried and true method. If you are doing regular bank transfers on a regular basis, some of the methods below may be worth investigating.
The Ultimate Way – Open A Chinese Company
Let’s start with the most ideal way, but also the biggest commitment of time and money: opening your own Chinese company. Many times this is done with a WFOE (wholly foreign owned entity) structure, which basically means it is 100% foreign owned – by a non-Chinese person or company.
Another option is having a local Chinese partner, and setting up a joint venture (JV), yet you need to make sure you trust this partner, as we normally say, a business partner is more involved than a marriage in some cases!
By opening your own Chinese company, you will have a Chinese business bank account where you can wire funds from overseas, and have the money legally converted into Chinese Yuan (keyword: legally) to pay your suppliers, staff, and other business costs.
Using a structure like this, you have ultimate control of the currency, the payment timing, and tax treatment. But like Uncle Ben says in Spiderman, “with great power, comes great responsibility” – and having your own Chinese company will mean more upkeep. You’ll need to keep a Chinese business address, file taxes monthly, yearly audits, and more. So we normally only advise this when your company has grown to a certain level. The cost of lawyers or agents ranges in the thousands of dollars, and between company setup and banking it will take months to process.
Having a Hong Kong Business, and Paying Suppliers in HK
The second best investment is a Hong Kong company. This is an investment, but nowhere near as big of an investment as a Chinese company (WFOE). Having a Hong Kong business bank account is often seen as the golden ticket. You can ask your Chinese factories if they have Hong Kong banks and oftentimes they do.
Using a HK company then can allow you to manage your cashflow in the following way:
1. Have your “investment money” for buying inventory stored in HK.
2. When you need to make a 30% deposit to a supplier, if they have a HK bank, it is often same day or next day for little fee (or no fee if same HK bank, such as HSBC).
3. They deal with getting the USD into Chinese Yuan when they want to.
This has been a common strategy for many product based businesses over the years. They have their Asia based company in HK, and pay suppliers in China, or even other countries in Asia, and then have their Western country company (USA, EU) to collect money from customers.
Note/disclosure: I’m a business consultant and blogger on all things Hong Kong www.globalfromasia.com, so I am a bit biased towards leveraging a HK company. As everything in this blog post, do your own due diligence and cross-checking before making a big decision such as opening a new entity and bank account, and don’t do it to hide from your own government and tax department.
Hong Kong for decades has been a haven for import/export companies buying from China and selling to the West. Its English legal system, globally recognized multi-currency banks, and proximity to Mainland China has been the perfect combination. Yet we also have noticed banking to be much more strict, due to some business people taking advantage of the ease of doing business there. So have a good business case to prove to the banker before applying.
Using Third Party Payment Providers
There are quite a bit of payment providers nowadays to help you receive and send money as an e-commerce seller. Such popular solutions like Payoneer have allowed Amazon sellers to receive their funds and then be able to send them to their international bank account, or directly to a supplier for a payment.
You can also use Remitsy, which helps you send Chinese yuan to Chinese suppliers without needing your own Chinese RMB bank account. Doing this can often help bargain a lower price with the supplier, as they don’t need to add in extra margin for USD/RMB currency risk.
Remember, that China operates in their controlled currency, the Chinese Yuan, and factory bosses need to pay their workers, rent, and subcontractors in this currency. By having the ability to pay them in their home currency, you can help them mitigate the risks of currency fluctuations between the time the product quotation is sent and the order is shipped (often a few months in between).
In addition to currency risk and exchange rates, there is taxes. It is a bit out of scope for today’s guide, but many in China have heard of fapiao when at a restaurant or buying something. Exporting products from China has similar process, basically in the form of a tax rebate from the Chinese government. To explain as simply as possible, this is due to the goods being taxed upfront, rather than added once the end customer buys it (sales tax). The factory should file for a tax rebate once the goods are exported, as these goods were not sold “B2C” and instead “B2B” to a foreign country and China does not tax that. This is a conversation you should have with your factory, and they will be a bit surprised when you even mention you know this terminology.
Again, knowing is half the battle. By showing the factory you are experienced and have been through the process before, often they will be less likely to try to add extra charges to you.
Different For Every Situation – Don’t Let Payments Freeze You
Payment is a massive industry and can get to be your full time job if you let it. As a product based business owner, you need to focus on what matters, getting quality product and building your customer base and distribution. Be aware of the various ways of sending payment, but if you are paying some extra fees here or there – try to keep a big picture and just move forward tweaking the model.
How are you currently sending payments? I’d love to hear in the comment section below.