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When discussing payment term for LC with China suppliers, they care the most is how much LC interest will cost them, here is a brief chart of how the interest come from, so be negotitate more effectively.
Following some effective ways to communicate with China suppliers, finally, I’m successfully to change mind of the most tough big supplier, to give us 0% deposit, 100% LC 90 days.
If they could consider other aspects, this interest is not a cost for them.
| Open Long Term LC interest cost | ||
| Buyer (ex. Czech) | ex. 100,000 USD | Interest/cost (USD) |
| Issue LC | 100,000 x 1% | 1000 |
| LC time, ex. Year interest is 4%, time is 90days, means interest is 90days=1/4 year x 4%=1% | 100,000 x 1% | 1000 |
| Bank announce to bank | 7.05 | |
| Bank mail + post charge | 11.75 | |
| Supplier draw down LC fee (ex. China, depends CFO with bank relationship manager, how to negotiate draw down fee, and depends bank to bank country relationship, normaly 0.5~5%) |
ex. Order is 10,000 | Interest/cost (USD) |
| Issue LC, around 1% 1/ Process LC/document: open Credit Line, between bank connection (ABC trust Unicredit will be strong enough to pay, HSBC/CITI is better than local bank for international trade) 2/ approve credit Line: ABC approve Unicredit |
10,000 x 1% | 100 |
| Draw down time 1/ for supplier the later time to draw down before dealine ex. 90days after ship from China, the less interest need to payin China normally is 7.5% yearly setup by government
for 90days LC, If draw down time is 90days before deadline, interest is 90/360=0.25, 0.25*7.5%=1.875% |
10,000*1.875% | 187.5 |
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