‘How do I pay my China supplier?’ is an important question that importers in Western companies must answer to avoid putting themselves in a position of significant risk. The five tips in this post cover the following topics on managing supplier payments:
– Different payment methods, including the pros and cons of each
– Upfront versus installment payments
– Paying suppliers in Chinese Yuan/Renminbi
1. Bank transfer/Telegraphic transfer (TT) is widely accepted by buyers and sellers
Direct bank transfers from your local bank or internet bank to the supplier’s bank account have their advantages and disadvantages. They are accepted by all Chinese manufacturers but you’ll have to pay a fixed fee for each transaction while the supplier is charged a fee on incoming wire transfers. Banks also have pretty terrible exchange rates, emphasizing that moving money costs money. You can work around the high costs in two ways:
– Negotiate a lower transfer rate with your bank in exchange for using their service for all your overseas payments to the supplier.
– Negotiate who (the supplier or you?) will pay the incoming fees, outgoing fees, and intermediary fees, and include those terms in your written contract.
Processing times of two to five days create a risk of exchange rate fluctuations from the time the payment order is signed to the date payment is credited to the supplier’s bank account.
The know-your-customer (KYC) procedure to verify individuals and businesses makes payments pretty reliable. Paying the supplier in tranches (discussed further) offers a greater degree of protection.
2. A Letter of Credit (L/C) is suitable for large orders
A Letter of Credit is a letter from the bank guaranteeing full and timely payment to the supplier after shipment of goods. It is geared towards large orders and offers substantial buyer protection.
You don’t have to make a deposit payment. An L/C has an expiry date, which creates pressure on the supplier to meet delivery deadlines. The supplier must provide a bill of lading showing that the goods were shipped in accordance with the date stated in the letter of credit. Banks deem a late shipment a ‘discrepancy’ but you have the final say in accepting or waiving the discrepancy. You can even cancel the L/C, which does its part to keep the supplier on their toes and meet the requirements promised to you.
As prices are specified in the L/C and can only be modified by the importer, you are insulated against any last-minute price increase. Additionally, payment is released only after the supplier has fulfilled certain requirements. Before a transaction occurs, the supplier must provide quality inspection and laboratory testing reports.
The problem with this mode of payment is that it involves a lot of paperwork. The process is intensive, discouraging buyers and suppliers who aren’t confident about handling all the requisite documents.
3. PayPal is good for small orders only
PayPal is a safe, low-risk and paperless payment method. On the flip side, paying with PayPal is expensive and suitable for a small order or initial sample.
PayPal charges a percentage of the money received and a fee for every transaction
The online payment service charges a standard fee of 2.90% plus 30p per transaction. Chinese users pay 4.4% plus 30p. Chinese suppliers have to use a third-party payment service to move money from their PayPal account into their Chinese bank account. They incur withdrawal and conversion fees, and have to wait two days to get their money.
There’s also a currency conversion fee on balance and cross-currency payments. PayPal charges a commission of 3% for balance conversions and 3.75% for cross-currency payments. They don’t offer the best exchange rates and aren’t feasible for large orders.
Complicated seller protection policies pose a risk for suppliers
Chinese suppliers may decline PayPal payments to avoid buyer chargebacks. Unfortunately, PayPal lacks a straightforward dispute resolution and claims management process. Sellers may have a hard time resolving any issue where the buyer may have reversed the transaction after taking delivery of goods.
PayPal’s seller protection is also inadequate in another way. It covers a supplier if the buyer claims an item was not received, but not if the item is ‘not as described’. After a dispute is initiated, the supplier and buyer have 20 days to resolve the issue. The seller’s funds are temporarily unavailable when the dispute is in process.
The payment service appears to be on the side of the buyer, although payment protection policies for the party receiving the goods are also complicated. For this reason, it is best to use PayPal only when you’re purchasing samples during the supplier testing phase.
