It depends. In international trade transactions, different payment methods are used, each presenting different levels of risk. In general, letters of credit (l/c) are a relatively safe option, but in fact the safest payment method depends on the nature of your relationship with your partner.

If you are a European SME selling to China, the safest option will be to request an advance payment before the goods are actually shipped. The problem with this payment method is that your Chinese buyer will not be very willing to do so as this option is the riskiest for them. Your second-best option would be the letter of credit – a document issued by the importer’s bank guaranteeing full remission of the transaction amount. The problem with this method is that the bank would charge a percentage of the transaction amount, and that the process is very formal and requires a high degree of attention when drafting the terms of the transaction. If you are selling to a long-term and trustworthy partner, then documentary collections would be a good option as they are less formal and flexible; while you will definitely want to avoid open account payment methods. The entire process, however, is reversed if you are a European SME importing from China: your safest option would be an open account, followed by a documentary collection and then a letter of credit; you definitely need to avoid paying in advance.

At the EU SME Centre, we receive, on a weekly basis, emails from European SMEs which fell victims of scams by Chinese sellers/buyers. In nearly the totality of cases, scams can be avoided by taking very simple steps to conduct due diligence on the company: practical tips to avoid such scams and to minimise risks will be provided in specific FAQs in the “Legal and disputes” section.