Six tips for background checks on suppliers

I frequently lament about the number of importers who take
high risks by not doing any QC. But the most underrated
tool to reduce risks in China is certainly running a
background check on potential suppliers.
I listed six tips below, from the easiest to the most advanced
and expensive.
1. Choose the right target
Do not waste time searching information about the
company mentioned in the salesperson’s signature or on
the trade show booth. They might actually steer you toward
another company when time comes for payments.
Ask for the company name and address that will be
mentioned on the invoice. Or, better yet, ask for a pro
forma invoice (if both parties already have a good idea of
the products and pricing) and look at the company name
on that document.
2. Scare unscrupulous companies away
Tell potential suppliers that you will have their factory
audited before any PO is issued, and later their products
inspected before any shipment is authorized.
Mention it right away, from the first encounter or e-mail. If
the supplier refuses it or looks flaky, it is a red flag!
By the way, factory audits are the right tool to verify a
supplier’s claims about its production capability.
Most QC firms, and some sourcing agents, can audit a
factory based on a checklist that corresponds to your needs.
Prices range from $300 to $900 for one day of work in the
main production areas.

3. Spend 5 to 10 minutes on a search engine
Open Google or Bing and search ”[company name]
+ scam”, ”[company name] + dishonest”, and a few
variations. Importers who have a bad experience often try
to leave a trace about it on the web.
While searching the supplier’s company name, you
will likely find the profiles they created on several B2B
directories.
Look at the addresses and phone numbers associated with
the supplier’s company. If they are not the same, or if the
supplier does not respond when you give him a call, he
will have some explaining to do.
You might also see that they participated in trade shows
recently. This is a good sign.
A booth is an investment to get new customers and
repeated presence in the same trade show is the sign of
a company that cultivates relationships with the same
customers.
4. Use B2B directories
As mentioned above, the supplier has probably created
profiles on several directories. And, if they have a paying
account, some information on their profile might have
been verified by the company behind the directory.
For example, Global Sources checks important data such
as start date, number of staff in each department, factory
ownership, amount of sales, export rights and brand
names.
The tendency is to show more and more of these data out
there, in the open.
It contrasts strongly with China’s culture of opacity, and I
think it is a very good thing.
However, if this method does not help, you can pay for a
background check and get information first-hand.

5. Background check, on the cheap
Most of these verifications are performed by Sinotrust. For
higher convenience, you can order a report on
glo-bis.com/china. Their business credit report (BCR) service
provides these data:
• Business registration report: legal representative,
shareholders, business scope, date of establishment.
• Financial records of the last three years: Do suppliers
have assets that indicate ownership of a factory? Are they
heavily in debt? Are they profitable? These questions can be
answered by financial records.
Prices are slightly on the rise ($230 for a BCR two years ago,
$255 today), but are still very affordable.

I am not sure whether the target company knows when one
of their customer runs this type of verification on them. I
assume they are not aware of it.
If ever they learn about it, the customer should be proud of
it. It shows they are a serious customer, investing to build a
solid and long-term supplier base.
6. Background checks, together with professional advice
If you do not like a DIY solution, a lawyer or accounting
firm that works in China can help you. If you are not
familiar with Chinese business practices, they can smell
inconsistencies or red flags and warn you.
If you are about to place a large order with a new supplier, I
highly advise to work with a lawyer, both for due diligence
and for drafting an OEM agreement.
Note that, in this case, the supplier knows an investigation
is under way. Again, I believe importers should not be
apologetic about this.