How and when to pay the Chinese factory making your products is always open to negotiation. An importer that has been in business for many years and the manufacturer will have calculated the financial consequences and risks from choosing certain payment terms over others. Based on this assessment, they set preferences and deal-breakers. On the other hand, new buyers often seek advice on figuring out terms that protect their business and don’t hurt their China supplier partner either. Here are some relevant insights into managing supplier payments.
It is a matter of trust
Payment terms are negotiated on the basis of trust that both parties will honor their obligations. You trust the manufacturer to make products to your specifications and meet the agreed-upon delivery schedule. The factory trusts that you will release payment by set due dates to ensure they protect their already-thin margins.
How much to pay and when to take risks, applies to both the supplier and the buyer. It is the reason why western importers micro-manage the production process, arranging for multiple quality checks and safety certifications before taking delivery of their order. For manufacturers, the risk of non-payment from a new buyer cannot be overlooked. It is why a majority of Chinese factories don’t offer net terms to importers.
In choosing payment terms, consider potential risks to you but don’t overlook the manufacturer’s point of view. Negotiations can be pleasant and yield high results if counterparts understand the stakes and remain open to trade-offs that don’t compromise either business greatly.
Choose a payment method
Chinese manufacturers accept multiple payment methods. Common options including wire transfers and letters of credit.
Wire transfers/Telegraphic transfers (T/T): International wires or SWIFT payments are among the most common ways to pay suppliers in China. Your bank will give you a form to fill out. Refer to the manufacturer’s pro forma invoice to fill in the bank account information requested in the form. Share a digital copy of the form with your supplier.
You pay a flat fee for each wire transfer and the supplier also pays a fixed fee on incoming wire transfers. Some banks offer savings of a few dollars for recurring wire transfers, so make sure you check if you can get a discount from your bank. Processing takes 3-5 working days.
Letters of credit: A letter of credit is a letter from your bank guaranteeing full payment to the supplier upon delivery of goods. It is not as popular as a bank transfer because it favors the buyer.
Full payment occurs after you’ve taken delivery of your order. If the order doesn’t meet acceptable quality standards during the pre-shipment inspection, you can choose to cancel the letter of credit. Both you and the supplier will need to prepare a list of documents by a certain date to avoid issues with the transaction. For these reasons, some Chinese manufacturers may be reluctant to accept this payment mode.
PayPal: For smaller order values or the initial sample, PayPal is a good option. Transfers from one PayPal account to another occur instantly, and PayPal offers excellent security against fraudulent transactions. While PayPal offers convenience, expensive fees associated with international transfers, along with poor exchange rates are disadvantages. You have the option to use your credit/debit card to fund your transaction, but that will pile on more fees.
Chinese suppliers have to use a third-party payment service to remit money from their PayPal account to their local bank account. The risk of buyer chargebacks is another reason why Chinese suppliers generally tend to be wary of using PayPal for large orders.
Western Union carries the risk of being scammed by suppliers. As such, legit manufacturers never insist on this payment method. When purchasing from a new supplier, never agree to using Western Union. You could consider it once you have established a trusted relationship with your manufacturer, leveraging the benefit of sending and receiving cash quickly.
What to keep in mind when making overseas payments
1. The remittance company should be reliable, and ideally, an established name in the financial services industry. If your China supplier allows the use of online money transfer services, make sure you review the provider thoroughly before sending thousands of dollars abroad. Check the rates and charges available at different providers, as well as reviews of their customer service. If you face an issue during your first international transfer, you’ll need a 24/7 support team to step in and fix your problem at the earliest. Also consider the speed of transaction, and the costs and convenience to your Chinese supplier.
2. Be aware that manufacturers that make their email and bank account information publicly available on supplier directories are at a risk of being hacked. While rare, such attacks against the supplier’s email account occur silently, so there’s no way for either party to suspect anything. It can be as straightforward as receiving a pro-forma invoice seemingly from your supplier but with the bank account details of the hacker. Once you’ve sent the money, there’s no way of recovering it, resulting in a loss for you and the Chinese factory.
3. Plan remittances ahead of time. Fluctuations in cash flow or a sudden event can create stress, pushing you to make hasty decisions. Ensuring that payments aren’t affected will help you remain on good terms with your China partner, which is especially important in the early stages of the relationship.
A 30:40:30 split is fair to both parties
What if you agreed to paying your supplier 100% of the purchase order value in advance? Making such a payment up front can be a gamble and you potentially risk unknown service and quality. If you then receive inferior quality items or the manufacturer has missed the deadline you would then be left with no option but to call the manufacturer up and negotiate a refund or replacement. The Chinese company can refuse, and not be affected if you terminate the manufacturing contract. Meanwhile, you’ve lost your money and now need to start over and find another supplier.
