5 Mistakes to Avoid When Paying Overseas Suppliers


There’s a lot of uncertainty about the future of the US manufacturing industry, with many highs and lows recorded over the last few years.

On one hand, manufacturers are facing supply chain disruption, global logistics backlogs, labor shortages and recession pressure. These were the main challenges highlighted in the National Association of Manufacturers (NAM) Q2 2022 survey, with 59% of industry leaders believing inflation would make a recession more likely in the next 12 months and 90% of respondents citing raw material costs as a major issue. 

On the other hand, initiatives like the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS) and the Inflation Reduction Act (IRA) offer potential solutions and growth opportunities. While these policies are excellent for building long-term growth and stability, there’s a lot you can do right now to reduce the impact of the challenges we’ve mentioned.

Given the ongoing economic challenges facing businesses right now, protecting your finances has never been more important. But when it comes to paying overseas suppliers, we’ve seen businesses make a few mistakes – all of which are easily avoidable.

Do you have a written contract with each of your international suppliers? Do you have a payment protection clause built into your supplier contracts that protects you from faulty or damaged goods? Do you have any systems in place to make sure you don’t send money to a fake bank account? These are all questions you should be asking before you issue payments to international suppliers. Don’t worry; we’ll walk you through this so you don’t make the same mistakes.

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1: Not requesting a sample

It might seem obvious that an international supplier would provide you with a product sample, but that’s not always a given. You need to make that request up front. Now, what if a supplier says: Don’t worry. We produce goods for lots of big brands and have never had any issues? Should you simply take their word for it. No.

You’re responsible for protecting your business and making decisions that benefit your business. So, you should always ask for samples before signing a contract with an international supplier so you can see for yourself if they can meet the quality standards you expect.

If you take their word for it and don’t request a sample, you could end up with faulty or damaged goods, which won’t be of any use to you or your customers. That’s now time and goods that have been wasted. And you still need those goods produced to meet your customers’ demands. It’s not a good predicament to be in, right?

And if a supplier refuses to provide a sample, then that should be a major red flag. It could indicate that they may not have the capacity to produce the quality of goods you expect. It could also indicate that they don’t have enough cash flow to source the materials to complete the production order. Either way, you shouldn’t just take a supplier’s word for it – always ask for a sample and make sure it meets your quality expectations.

Here’s some things to look out for to make sure you get high-quality product samples.

Factory sample requests

Choose a sample type

  • Factory samples: This kind of sample has already been made and doesn’t have any customization. Factory samples may provide an indication of product consistency, but they don’t necessarily indicate if a supplier can produce bespoke products.
  • Pre-production samples: This is the type of sample to order if you want a customized product. But keep in mind that pre-production samples can take a long time to produce because the supplier will have to make them to certain specifications. You may want to have multiple suppliers lined up in case your expectations aren’t met.
  • Batch samples: These samples are taken from mass-produced products and can be useful indicators of consistency. 

Ask for the specifications

Once you’ve chosen your sample type, it’s time to get detailed. Asking about the details of the sample means you can overcome any language barriers and avoid miscommunication. This involves asking for information like color, size, material, weight and even drawing a diagram for added context. 

Watch a sample demonstration

There’s no substitute for seeing a product sample being created with your own eyes. Request a video call with the supplier so you can assess quality and functionality. This is also an opportunity to see any defects and request modifications before any samples are shipped.

Confirm pricing and processes

The final part of ordering a sample comes down to getting the price and manufacturing process confirmed. Every supplier will have their own method of manufacturing samples and receiving payments. So, the sooner you qualify it all, the better.

You're placing a lot of trust in these suppliers to be a crucial cog in your international supply chain. If they stumble at even one hurdle, it could set off a chain reaction that impacts your cash flow and jeopardizes your relationship with other businesses too.

So, we can’t overstate the importance of due diligence and asking essential questions like:

  • What’s your typical manufacturing and shipping time frame?
  • Are you open to receiving sample feedback?
  • Will any design changes impact lead time?
  • Are you open to negotiating prices?
  • Do changes lead to an increase in unit price when I’ve placed an order?
  • What incentives could you offer if I increase the total order quantity?
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2: Skipping written contracts

You’ve got your samples and everything is above board on the surface. Now it’s time to dig deeper by arranging for a contract to be written up and signed by both sides. You might be saying to yourself: ‘We’re in a rush to get this order completed and I’m not sure we have time to wait for a contract to be written up, reviewed and signed.’

You can’t afford to make the mistake of not having a written contract between yourself and international suppliers. Why? Without a contract, a supplier could stop delivering and there would be little to no consequences for that. So, you need to have your legal team draft up a detailed contract that covers different stipulations and clauses and protects you from losing that money.

While a written agreement doesn’t necessarily stop international suppliers from doing things outside the terms of the contract, you still have legal leverage if something were to go wrong. 

Supplier contracts

For international business contracts, these are sections you should include to ensure you’re protected.

  • Duties: Miscommunication happens when one party believes the other is responsible for completing a certain action. Duties on both sides should be specified in the contract. For example, specify the INCOTERMs rules to establish risks and duties associated with shipping goods between countries and which party is required to obtain an importing license.
  • Language: When working with a supplier in a country where English isn’t the primary language, don’t just assume that you’ll get a contract in English. Both parties should discuss and agree that the contract will be written in English. This should also cover future correspondence via email, text, video and phone.
  • Currency: The type of currency used for payment should be clearly specified in the written contract. For example, many countries like Hong Kong, Canada and Australia use ‘dollars’ for their currency. But these aren’t the same as US dollars. So, the contract should state which dollar amount is intended (i.e. USD for US dollars or AUD for Australian dollars) to avoid any confusion or issues. 
  • Liabilities: A protection stipulation should be included in case of damaged goods or poor product quality. 
  • Anti-corruption: Having a clause that stops international suppliers and their subcontractors from making prohibited payments under the US Foreign Corrupt Practices Act (FCPA) means you can stay within the law. 

While this isn’t an exhaustive list, you should have this information as a bare minimum in any contract you write.

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3: Paying 100% upfront

According to our ‘Feeling the Recession Pinch’ research study, faith in customers is pretty low these days with 21% of North American businesses asking for partial deposits or full payments upfront. Part of that is certainly down to how common late payments have become. Another part of it is likely fuelled by recession fears, making business leaders panic that they won’t have enough incoming revenue and cash flow to sustain their business.

We recommend sticking to Net 30 or Net 60 payment terms because there are many factors beyond your control when working with international suppliers. This includes delayed shipping, political sanctions and product manufacturing processes that could significantly impact your financial health.

There’s also the risk of losing your most compelling negotiating tool – a refusal to send more money until a supplier corrects unsatisfactory work. Imagine you pay a factory in full at the start of a project and the goods you receive are damaged or they fail to deliver the goods at all. You’ve exposed yourself to huge financial risk and there’s no way to recoup the losses.

Using Net 30 or Net 60 payment terms can be extremely beneficial in maintaining a positive cash flow. Now if international suppliers simply won’t agree to Net 30 or Net 60 payment terms, then you can look to negotiate paying a partial deposit of 30-60% up front and then paying the remaining balance upon delivery of the goods. This won’t be so risky if you’ve followed our other guidance earlier – establishing a written contract, requesting samples up front to verify the supplier’s production quality and building payment protections into your contract.

Our main takeaway here is that while maintaining positive relationships with your suppliers is important, you shouldn’t go into these relationships blindly. You should always use the right technology and data to anticipate and protect yourself against the risks your customers could pose to your business. 

International payments to suppliers
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4: Sending money to a fake account

Every year, scammers and fraudsters become more adept at imitating legitimate brands and convincing foreign buyers to send payments for goods and services they have no intention of delivering. This is backed up by PwC’s 2022 Global Economic Crime and Fraud survey, which found platform fraud to be the most damaging type of crime businesses deal with.

Platform fraud involves a scammer using a mixture of payment, media, ecommerce and goods platforms to trick buyers out of money. Here are some tips so you can steer clear of this type of fraud.

  • Check that the ‘Pay To’ account information on an invoice is the same as the company name that you’re planning to do business with. For example, if you’re buying light bulbs from Light Bulbs Inc and the payment instructions on the invoice ask for a wire transfer to QRZ Inc, you should pay attention to this discrepancy and do some investigations to make sure you’re not being scammed.
  • Watch out for invoices that ask for payment via PayPal or ask you to send a wire transfer to a personal bank account. Make sure the names on all invoices, bank accounts and shipping documents match the name of the actual factory you plan to work with. If not, that could be a sign you’re in talks with a fraudster.
  • Run an international business credit report to check a supplier’s credit score, DBT (days beyond terms), legal filings, balance sheets and estimated sales to see if the organization has sufficient funds to complete the orders you’ll be sending to them. And don’t forget to check which people are registered as official directors of the company you’re talking to – make sure they are legitimate and not a scammer. 
Sending money to fake bank account
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5: No payment protection for product quality issues

Before paying suppliers, make sure you have protection policies in place against any damages, faults or quality issues with goods. If any issues come up, you’ll be able to get your money back. There are several ways to protect your finances and manage quality control:

Choose a safe payment method 

Depending on your circumstances, you may want to consider a couple of payment options. The first is cash in advance, which means a supplier can avoid credit risk because payment is received before the ownership of the goods is transferred and is done through wire transfer or credit cards. But this could put a strain on your cash flow. Plus, you’ll likely be worried that if you pay cash in advance, you might not ever get the goods delivered. So, that’s money lost and customer orders that could go unfulfilled, which means you could lose your loyal customers and their repeat sales.

The second and arguably safer option is a letter of credit (LC). This is a promise from a bank on your behalf that payment will be made to your supplier as long as the terms and conditions within the LC have been met and verified through all the necessary documents. You pay your bank to render the service and an LC protects you as there are no payment obligations until the goods have been shipped by the supplier.

Set product quality rules

Defining what product quality means to your business is a subjective experience and you shouldn’t define anything lightly. Ask your wider team for their input and have open conversations with suppliers. Some questions to ask everyone involved are:

  • Problem-solving: Does the product solve a specific problem and to what extent does it fix the problem?
  • Functionality: How easy is the product to use? Is it complicated or does it take only a few seconds to figure out what it does?
  • Design: Does the product look cheap or high-quality based on its aesthetics? Are the colors and dimensions accurate? 
  • Specificity: Is the product tailored to our customers’ needs? Has it been customized or is it a one-size-fits-all solution? 

Source from multiple suppliers 

Like we’ve said, investing in product samples is a solid try-before-you-buy tactic. But you can reduce your risk significantly by sourcing from multiple suppliers. This is especially useful when you’re looking for bespoke products and you aren’t 100% confident in a single supplier’s ability to meet your requirements.

Having more options means you can filter out organizations that are underperforming and focus on the suppliers who are providing the biggest return on investment. It can also make your supply chain more resilient and reduce losses if you work with suppliers in countries where there is political conflict, worker disputes or other issues that could halt production of your goods.

Working with international suppliers and unsure of what you can do to protect your payments?

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