When beginning a relationship with a supplier in China, deciding the payment terms and how to actually pay for the goods ordered can be a tough task. Anyone who is sourcing products from China for the first time will have some concerns such as how much to pay when, what payment methods to use and how to ensure that you actually receive the right goods once you have made the payment. In this post, we will try to address most of your concerns regarding payment to Chinese suppliers.

Regardless of the payment methods you choose, there are some things that you should always keep in mind. The first one is that you should always make money transfer to a business account and not to a personal account. It is obviously safer to transfer payment to an account in the company’s name with full address rather than to an individual. Also, you must fully document all the payment terms and have an agreement signed sign an agreement with the supplier. This agreement should cover everything right from when will the payment be made, via which payment method and what happens in case the delivery is delayed.

Another very important thing to note here is that frauds are not very common when dealing with Chinese suppliers. If you choose a wrong supplier, you may have issues with quality or timely delivery, but financial frauds are uncommon. Nevertheless, nothing should be left to chance.

When you have a long-standing relationship with a supplier within your own country, you may be used to paying them after a couple of months of delivery. However, a supplier in another country may not accept the same terms. They would want a deposit before they start the production process. Usually, they would take 25-30% as deposit and the remaining amount upon completion. This is particularly true when you are working with a particular supplier for the first time. For repeat orders, you may be able to negotiate better payment terms.

The supplier may demand a bigger deposit if he has to make large upfront expenditures for your order. When we say you need to pay the full amount upon completion, it means you pay when you receive a copy of the Bill of Lading, which denotes that your shipment is out for delivery.

Chinese suppliers are quite flexible when it comes to payment methods. They normally accept a wide variety of payment methods. So, you need to do some research and based on the pros and cons of each payment mode, determine the one that will best suit your needs. Here are some of the most common payment methods used:

It is a letter from a bank guaranteeing that the buyer’s payment to the seller will be received on time and for the correct amount. For example, if you buy 5000 pieces of glassware from a Chinese supplier for which you need to pay $15,000 to a Chinese supplier, you will pay $15,000 to your bank. However, the bank will not release the funds to the supplier till the shipment has arrived in your city. The bank charges a percentage fee (about 2%) for the payment. Many small/medium scale manufacturers do not accept Letter of Credit.

Wire transfers refer to the transfer of funds from one place to another via a network of banks and financial institutions across countries. Bank transfers are the most common type of wire transfers. This method is most commonly accepted by both buyers and sellers. However, wire transfers tend to be expensive, because you it involves a lot of costs including a fixed transfer fee, which each participating bank charges, the exchange rate margin and other costs. Moreover, it may take 2-5 days for the payment to reach the recipient.

Escrow is a service that allows both seller and buyer to protect a financial transaction by placing the funds with a trusted third party until a predefined set of conditions are met. This is how it works:

1. Buyer and seller agree to the escrow terms and the buyer funds the Escrow account
2. Seller ships the products to the buyer
3. Buyer accepts the products
4. Escrow pays the seller

The criteria for releasing funds could include the buyer receiving the products within pre-defined timeframe. Though quite useful, this payment method is not too popular among Chinese suppliers.

For small orders or for initial samples, e-wallets such as PayPal could be used. For larger orders, PayPal can prove very expensive due to the high fees involved. Moreover, there is a limit on the transaction amount that can be made in a day.

The best way to avoid all the payment related risks and to ensure that you receive quality products within stipulated time is to hire services of a sourcing agent China. This is what most of the successful exporters across the world do.