Paying an overseas equipment supplier

Buying a machine locally is a transaction. You pay, it arrives, and if it does not work you know where the supplier lives. Buying one from a factory overseas is a project, and the reason it feels uncomfortable is that the money and the machine are separated by several months and a legal system you have no practical access to.

The supplier will not build a made-to-order machine without money in front. You would rather not send six figures to a company you have never met, in a country where enforcing anything is expensive. Both positions are reasonable, and the structures below exist because that standoff is a solved problem.

The gap you are actually bridging

• Manufacturing, which for made-to-order plant is commonly two to four months.
• Shipping, which is weeks, plus whatever the port decides.
• Customs, quarantine and inland transport.
• Installation and commissioning, before the thing has earned a cent.

That can be half a year between first payment and first production. Your financier's security does not exist yet for most of it, which is the reason they take an interest in how the payments are structured.

Letters of credit

A letter of credit is your bank undertaking to pay the supplier's bank, but only against documents proving the goods were shipped as agreed. The supplier is not relying on you any more; they are relying on a bank. You are not relying on the supplier's honesty; you are relying on documents.

The catch is that a letter of credit pays against documents, not against a working machine. If the paperwork is compliant, the money goes, and a dispute about whether the equipment actually performs is a separate fight you are having after payment. That is precisely why the next structure exists.

Escrow, and when it earns its cost

Escrow puts the money with an independent third party who releases it as agreed conditions are met. Unlike a letter of credit, those conditions can include things that happen after delivery.

It is worth the cost, generally one to three percent, when several of the following are true at once.

• The equipment is worth more than roughly $250,000.
• The supplier is overseas and you have not dealt with them before.
• The build takes more than about ninety days.
• The machine is made to order and has no ready resale market if it is wrong.
• Commissioning matters, meaning the asset can arrive intact and still not do the job.

Two arrangements do most of the work. Milestone escrow releases against stages of the build, commonly something like a fifth on order, a third at a defined build stage, a third on shipment and the remainder on delivery. Performance escrow holds back a portion, often around ten percent, for a period after commissioning, released only once the equipment has actually run.

That final holdback is the most useful clause in the whole arrangement and the one suppliers push back on hardest. It is also the only part of the structure that protects you against a machine that arrives on time, passes inspection and does not perform.

Progress payments without escrow

Plenty of purchases run on progress payments alone: something like thirty percent on order, forty at a defined stage of manufacture, thirty on delivery. It is cheaper because there is no third party, and it is exactly as safe as the supplier is honest.

If you go this way, tie every payment to something verifiable rather than to a date, and get the middle stage inspected by someone who is physically there. A third-party inspection at the factory costs a fraction of the payment it releases.

Three things people forget

• Insurance has to cover the goods in transit for more than the invoice value, because a total loss costs you the freight and the duty as well. Cover of at least around 110 percent of the contract value is the usual expectation, and your financier may require it.
• Currency. A price quoted in another currency is not a price. If the exchange rate moves eight percent between order and final payment on a $600,000 machine, that is nearly $50,000 you did not budget for. Ask your bank about fixing it at the point you sign, not the point you pay.
• Set a longstop. Agree a date beyond which non-delivery entitles you to your money back, commonly around 120 days from the first payment. Without one, a supplier that goes quiet leaves your funds committed indefinitely with no mechanism to recover them.

Where your financier sits in all this

An equipment financier is usually willing to fund an imported asset, and usually unwilling to release funds against a machine that is still in a factory on another continent. Most will settle on delivery, some will fund progress payments against milestones, and a few will not touch a made-to-order import at all.

Find out which of those you are dealing with before you agree a payment schedule with the supplier. A deposit structure the financier will not support means you fund the early stages yourself, and discovering that after signing the supply contract is an expensive way to learn it.

The documents behind all of this, the supply contract, the escrow terms, the letter of credit wording, are legal instruments and should be looked at by a lawyer who does trade work. What is described here is how the structures behave commercially, which is what you need in order to ask for the right one.