This article will detail how an importer can confirm his product’s quality while paying by bank wire (let’s say the deposit is 30%).
Important note: what I wrote below is relevant primarily for sea shipments. For air shipping, the remainder (usually 70% is paid before the goods leave the factory).
First, how does this mode of payment work?
A 30% down payment is wired (by telegraphic transfer) before components are purchased and production is launched. This step usually follows the final approval of prototypes by the importer (the purchase order can be given before this point).
The remaining 70% is wired after shipment. Technically, the supplier faxes the bill of lading to the buyer to prove the shipment.
Advantages:
- This mode of payment is very inexpensive (in bank fees), for both parties.
- In general it is the type of payment that suppliers prefer.
- Very few buyers cancel their orders and lose the 30% cash advance—unless a disaster takes place.
What should an importer do before wiring the deposit? What are the main risks to avoid?
# Risk No. 1: the supplier might not be honest; he might disappear with the cash. Unfortunately, scams happen in China. The buyer should make sure his supplier is in for the long haul. If he’s sure that other customers are happy and keep paying good prices, he’s probably fine. But how to make sure of this?? In most cases, the best solution is a background check.
# Risk No. 2: the factory cannot show you a prototype of what you want, before production starts. This is clearly a red flag. For simple consumer products, they should have samples on hand and should be able to send something to you within 10 days.
# Risk No. 3: the factory might not be able to produce up to your quality standard. Don’t forget, the samples you approve during development are generally not made in the workshop under bulk production constraints! If you have serious doubts, send an auditor or one of your technicians in the factory and ask for his opinion. For certain types of products, you might want to ask for a pilot run (i.e. producing a short series first) and send an inspector to check these products.
# Risk No. 4: you issue a purchase order, you approve samples, you wire your deposit, but you have not signed a contract with your supplier. For large orders (or for orders that you can’t cancel with your own customer), you are strongly advised to let a specialized law firm craft an OEM contract. It lowers risks, and gives more leverage if things go wrong. Do you think contracts are useless in China? Maybe you should read this: Enforcing Contracts in China on the China Law blog.
# Other important elements: don’t wire the money on a personal account, and don’t wire the money to another company, except if you get a stamped certificate that the payee and your supplier can be considered as the same company.
What should an importer do before wiring the reminder? What are the main risks to avoid?
# Risk No. 1: The products coming out of the lines are not conform, or they can’t be sold because of too many defects.
What you want to do is spot it as soon as possible. You need to send QC inspector(s) in the factory. If the first finished goods appear towards the end of production, an in-process inspection (at the beginning of production) can be the right solution. But if finished goods can be checked earlier in the cycle, this is when you should send an inspector. Finding quality issues at this point will give you some time to find a solution.
# Risk No. 2: The factory does not pay enough attention to packaging or to the way to load the container.
A pre-shipment inspection, which can be combined with a loading supervision (i.e. an inspector might be able to stay in the factory and check the loading of the container), is the appropriate solution.
# Risk No. 3: The factory sends cartons full of something you didn’t order.
Fortunately, it seldom happens. But what to do to avoid this risk? Here again, a loading supervision should catch this trick. Make sure the inspector opens a few cartons and take photos of the products.
As you can see, most of the “actions” should take place upstream — actually before even a deposit is wired. You have to put a sound system in place while your supplier is likely to accept it (i.e. when he is waiting for payment).
If you can only pay for one QC inspection, have it done during production (except if the packaging stage is the most sensitive one). If issues are noticed, you can probably force your supplier to pay for a re-inspection, which can take place after all is repaired and packaged (if appropriate).
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Hi!
Thanks for the great tips.
I have a question. If we’ve deposited 30% and after the shipment came, the defects were detected and the shipment failed the quality control. What practices are used then?
Do we pay only 60% of the rest, taking 10% as the fees?
Hi Quang,
I guess you mean you detected defects BEFORE the shipment. In this case, there are no rules, but there are generally 2 options:
-1- You ask the factory to sort out the bad products, repair/discard them, and present 100% of the shipment quantity for a 2nd inspection by an quality control firm. The re-inspection fees are re-invoiced to the supplier (it is quite common).
-2- If you just have to ship NOW, you can negotiate a discount. This discount can be equal to the proportion of major defects (if you took the pain to count them precisely), and you can add something for the expenses you will incur upon receipt (if you have to check each product in your country).
The most important is that you negotiate a solution before you settle the whole payment, and also if possible before shipment…
I hope it helps.
Renaud,
Thanks for the prompt reply. I meant AFTTER the shipment came. We are ordering a small quantity (1000 pieces) of electronic devices, so we cannot control thr quality by delegating someone to China.
But i think we would use a discount method, as you suggested. Thanks a lot!
Quang,
Yes, a discount is probably the best thing you can get.
Asking for a re-production and re-shipment for free is not realistic.
By the way, if you use a freelance inspector, it might be worth it to have a quick check before shipment. Just contact me for more info: ra (at) sofeast.com
Renaud,
I have yet to come across a supplier of mobile phones that will ship BEFORE the remaining 70% is deposited. Is this just a default position that suppliers in China adopt, and might I change it with some negotiation?
Jorge,
In most cases, the importer has to pay before the goods are shipped out.
In some cases, the supplier accepts to ship and to get paid just after.
In the best case (when a good relationship has been in place for several years), the importer wires 30% before production, 40% before shipment, and 30% after delivery in his warehouse.
this is really helpful thanks.
I have some questions about the minutiae of the process.
1. Would I expect to have a sample/prototype of the product?
2. Would I also expect to have a corresponding data sheet detail the grade, type, standard of the materials that would be used?
3. How would I know whether the sample was made to the spec on the data sheet without external verification?
Thanks
Mack
Gerry,
#1 and 3: Yes, you need to have a perfect (or near perfect) prototype before you wire the deposit. You can check the prototype when you receive it in your office, or you can pay a QA firm to review it for you.
#2: No, the supplier will usually not give you a bill of materials. This is up to you to prepare it. A QA firm could help you in this task.
Let me know if I responded to your questions.
Hi Renaud,
I made a fabric order to a chinese supplier. I was pleased with him at first as he seemed to speak very good english and showed me good samples. To protect myself I drew a contract and then agreed on the terms 30% before production 70% before shipment. He added on his proforma invoice that the leading time would only be 15 days. However, our relationship turned sour when he kept on finding excuses to delay the bulk production and then the shipment, so much that it took 3 months before he announced the shipment. I managed to renegotiate the terms to a 30% before production, 35% before shipment, and 35% after delivery payment, which he agreed on. Still he continued on delaying the shipment for another 3 weeks, consistently falling short of several promised deadlines, which in turn led me to delay over and over again my production and missing sales opportunities.
Now the fabric has finally arrived and I will perform a quality check: if the quality is not good, what are my options? can i refuse to pay him the remainder? What about the delayed in my production: can I withhold some of the payment to compensate for that?
Thank you
Lily,
If quality is not good: yes, you can refuse to pay him the last 35%. And do not ever work with them again.
On the other hand, if quality is good, I don’t advise to reduce the amount because of late delivery (except if you seek revenge, and you don’t intend to work with them ever again).
Next time, include penalties for late shipment: 2% the 1st week, total 5% the second week, total 10% the 3rd week, etc.
Renaud, do you think in above case with payment terms “30% before production, 35% before shipment, and 35% after delivery payment” the second phase could optimally involve product quality inspection before shipment?
Yes, good point. Make sure the goods are good to go before shipment (and the factory does all the repairing work if necessary — not your own staff).
Thanks Renaud for this informations. I think i’m that kind of youg start-up who’s has been made a lot of mistakes in the process and we try to resolve the points where we have been failing. I’m working with indians locals workshops and rural weavers and it’s very complicated to manage. Just a question, what do you mean exactly by “background check”? Do you mean a guarranty check if the quality is not respected or if it’s a new supplier?
Hi Florence,
By background check I mean some basic due diligence about potential suppliers.
See https://www.qualityinspection.org/background-checks-china/.
hi
i need to buy the the specific product model and search more for suppliers and most of them give me the same specific and price from china, India, Indonesia, Malaysia and etc. they don’t deal with L/C term and want to deal in T/T . if i want to get samples from them it will take much expensive cost to consider they models. their certificates and background check is available but i still cant trust on them .
how can i find the reliable supplier within them ?
thanks,
If your orders are very small, you will have to take a certain risk.
If you can devote some time and money to check them, I invite you to read https://qualityinspection.org/background-checks-china.
Hi Renaud.
About prototype/sample, manufacturer usually will provide sample from bulk run for their previous client or hand-make it but not initiate machinery to prepare 1 or 2 samples for me? The problem is discrepancy between sample in listing and sample received in case it was different raw material-wise or even was OEM for previous client. Can this be the case and how often?
You mentioned sending sample for 3rd party QC agency for assessment and I thought if it would be good idea to have 2 samples ordered:
Option 1: Have 2 samples delivered to my hands for comparison where I send 1 sample to 3rd party QC agency in China and 1 stays with me just in case former “gets lost”
Option 2: Have 1 sample delivered to me and another to 3rd party QC agency. If both match each other or one is better than the other, specify closest match to 3rd party QC agency and instruct them to bring sample to manufacturer. If the case is about significant order, then have that sample mentioned in sales agreement and Pro Forma Invoice and optionally non-conformity penalty?
Thanks
I can’t really respond without knowing what type of product you purchase from China.
Option 1 is the most common.
Option 2 is dangerous because the supplier might send a nice sample to the buyer and a crappy one to the inspection agency (on purpose).
Option 3 is also possible: factory sends 2 samples to inspection agency, which compares them. If they are acceptable, keep the nicest one and send the other one to the client. If they are not acceptable, supplier is to prepare new samples right away and start the process again.