Many inexperienced importers accept the payment terms proposed by Chinese suppliers without thinking twice. Yet this topic is directly linked to the amount of risk each party takes. It is extremely important.

1. The most common payment terms for sea shipments

Chinese suppliers usually propose this setup:

30% by bank wire before production starts, 70% balance by bank wire before the goods are handed over to the forwarder.

And they can often (but not always) accept this alternative, which is more favorable to the buyer:

30% by bank wire before production starts, 70% balance by bank wire after the goods are shipped out and after the supplier has sent a copy of the bill of lading to the buyer

Notes:

1. A Chinese supplier never wires the advance payment back. It should be called a “nonrefundable deposit”. That’s why buyers need to screen their suppliers carefully. And factory audits are very good tools to this end.
2. Payment is done before the client sees the products in his warehouse. And faulty products can seldom be sent back to China for repair. That’s why a quality inspection before wiring the balance is a very good idea in most cases. If you find quality issues after 100% has been paid, you have no leverage over the supplier.

2. Letters of credit (L/Cs)

I described the way L/Cs work before here and here. Basically, the buyer’s bank promises to release the payment once it gets certain documents (commercial invoice, packing list, bill of lading, certificate from an inspection agency, etc.) at the condition that these documents are (1) received in time and (2) in perfect conformity to requirements. If that’s not the case, the bank finds “discrepancies” and payment is suspended.

Suppliers are well aware that there are virtually always discrepancies, and in the end the buyer has the power — he can wait a little if he is short on cash at the time, or he can refuse the transaction if he doesn’t want the goods.

L/Cs are also a good tool for importers who buy for the first time from a supplier. The key advantage is that no “nonrefundable deposit” needs to be wired prior to production. So, if the supplier messes up the order completely, the loss is inconsequential on the buyer’s side.

Fortunately, some serious suppliers accept an L/C. The difference between an L/C “at sight” and a setup whereby the 70% balance is wired after the goods are shipped is actually not huge for the supplier.

3. Hybrid solutions

I have seen terms calling for a 30% advance by wire before production starts and for 70% by letter of credit at sight. It makes sense, for example, if the supplier is to pay for molds or special tooling.

Another variant: 30% by bank wire before production starts, 40% by bank wire before the goods are handed over to the forwarder, and 30% after the goods are in the customer’s warehouse. This type of formula seems to be gaining in popularity.

4. Extreme solutions

I see more and more North American importers negotiating (successfully) for payment terms of 100% after reception of the goods in their warehouse. Naturally, it is easier for large and established companies — Chinese manufacturers in their industry have heard of them and are pounding their doors.

I also remember a few large European companies offering to work on “open account” terms — i.e. the supplier ships and the customer pays later, if they want to.

5. The value of contracts

Chinese exporters, as well as Hong Kong-based trading companies, seem to regard contracts as close to worthless. Hence the importance of well-suited payment terms.

By the way, foreign importers tend to overestimate the value of their contracts. Many purchasers don’t know that Chinese courts don’t accept judgements from certain countries, including the US (more details here).

What do you think?

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Related reading: How to Pay Chinese Suppliers by T/T Payment (Bank Wire Transfer)