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FOR THREE YEARS, MAG Manufacturing, a small business based in Irvine, Calif., has been supplying Home Depot with Kleer Drain, a drain-opener device. To ensure the product's quality, Mark Allenbaugh, the company's president, opened a quality-control office in China — where Kleer Drain is manufactured — and hired a staff to inspect the factories. His hands-on approach began shortly after MAG received a shipment of thousands of defective Kleer Drain units that could have brought its new-found business with Home Depot to a halt.

In recent years, recalls have been on the rise, and many of them are issued because of a defective product made in China. From October 2005 to September 2006, the U.S. Consumer Product Safety Commission reported 467 recalls, the highest ever, according to spokesperson Patty Davis. About 50% of those recalls were for products made in China, she says. So far this year, the CPSC has registered 409 recalls, about which 60% are for products manufactured in China.

As large corporations like Mattel and Fisher-Price are tallying their recalled items, small businesses are experiencing a financial backlash from returned products and tarnished reputations. And, unlike their larger competitors, many small businesses don't have access to enough capital and legal protection to stay afloat. "If Mattel has this problem, I can guarantee you that small businesses do," says Allenbaugh, who also is a partner at Allenbaugh Samini in Newport, Calif., specializing in China trade law. For many of them, he adds, "this is a nightmare."

The situation has led many small businesses to take preventative measures to ensure that products they receive from across the Pacific aren't defective. When Smartparts, a Totowa, N.J., company that manufactures digital picture frames in China, began selling its product to Staples and Circuit City, co-owners Stefan Guelpen and Geoffrey Lewis stepped up its quality-control measures. Not only does the company maintain a quality-control office in China, Smartparts has used the services of a Taiwan-based independent lab to test the safety of its made-in-China frames.

With careful planning, small businesses that import products from China can protect themselves from a financial catastrophe. Here's how.

Get it in writing
Make sure all contracts are in English and Chinese, signed by both parties, and reviewed by a lawyer. Include an indemnification clause that appoints the supplier responsible for expenses resulting from a defective product.

Get insured
Product-liability insurance protects your business from injuries resulting from products you sell. A policy can protect you from costly lawsuits, says Bill Custer, a partner who specializes in product-liability litigation at Powell Goldstein in Atlanta. Ideally, the Chinese factory would also buy product-liability insurance from a U.S. insurer, Custer says. While it's rare, a Chinese factory might agree to such a request if you order many units and sell them to large retailers, he says.

Find trustworthy professionals
Some associations can provide useful information for a small business that wants to import products from China. The U.S. Consulates in Hong Kong and Guangzhou keep information about manufacturers and trading companies. The Hong Kong Trade Development Council hosts trade events. The US-China Business Council, the American Chambers of Commerce in Beijing and in Shanghai offer market-entry assistance

Go online
Sign up for emails from Recalls.gov to find out about recalls announced by the CPSC, the Food and Drug Administration, the U.S. Department of Agriculture, and other agencies. If you sell products made by many manufacturers, check their web sites.

Create a quality-control program
Appoint employees to check products when they arrive from China. If the products are defective, return them with a report from your engineer, advises Allenbaugh.

Grab your passport
If you have the capital means, visit the factories in China that manufacture your products. "It's imperative that one of the principals from your company goes," says Allenbaugh. Cultivating a relationship with your product's manufacturer can improve the attention to quality, he says.

Open a quality-control office in China
It may be expensive but it can ensure that defective products don't leave the Chinese shore. A simple office costs about $5,000 to set up, and roughly about $1 a square foot a month to lease the space, according to Allenbaugh. For experienced, college-educated, English-speaking employees, expect to pay about $25,000 annually, in addition to a housing stipend, medical benefits and a bonus equivalent to one month's salary, he says. U.S. business owners, who typically take advantage of China's cheap labor to trim manufacturing costs, need to make sure the cost of operating a quality-control office doesn't eat up savings. To find employees, contact the Beijing Foreign Enterprise Human Resources Co..

Hire third-party inspectors
Companies like SGS visit factories to conduct quality control. They also provide a risk assessment, which among other things evaluates how efficiently a product is made. They can even make surprise inspections, says Robert Collins, co-author of "Doing Business in China for Dummies" and former officer at American Chamber of Commerce in China. Depending on your request, inspectors' services can range from less than $1,500 to tens of thousands of dollars, says Allenbaugh. "Still that is a fraction of the cost of a recall and lost business," he says.

Independent Test Labs
Although they can be as pricey as third-party inspectors, labs like Intertek and Bureau Veritas confirm a product's safety and quality.

It's Not My Fault!
Small-business owners who don't manufacture products in China might still be affected by the growing list of recalled products.

This past January, Deirdre Bourke and Erin Selover opened their Sacramento shop, Wagger Pet Spa & Market, selling all-natural foods and other specialty products for pets. By April, two items on their shelves, Natural Balance's Venison & Brown Rice Dry Dog Food and Venison & Green Pea Dry Cat Food, were recalled. The foods contained a rice protein concentrate, which was imported from China and was laced with melamine, a toxic agent, according to the FDA.

"I was horrified," says Bourke. "Even the littlest bit of melamine can shut down [dogs' and cats'] kidneys."

Some quick thinking mixed with preventative measures helped save the day and the business. When Bourke first heard of the tainted dog and cat food, she logged onto her point-of-sale system and tracked down customers who bought the products, providing them with a refund and suggesting other products for purchase. She also checked the Natural Balance web site for updates and called its representatives on a daily basis. Since then, Wagger's customer base has grown to 1,100 shoppers from 300, she says.

In addition, the financial hit was minimal because Natural Balance covered the recall costs — one reason why it's best to sell products made by a well-known manufacturer. "Good companies have so much at stake that they won't jeopardize their reputation," says Jacques Stambouli, CEO of Via Trading Corp., a small wholesale business based in Vernon, Cali.. "They'll compensate you if their product is found to be unsafe."