When considering different options of payment, it is important to focus on “collateral” aspects that in some cases can make the difference. Safe payment method can protect you from getting in a dispute with suppliers about quality standard issues, payment terms, timely delivery, etc. Do not forget that in case of a dispute on quality standards or any other type of complaint, you should be able to get your money back.
Last but not least, always check the commission for transactions.
Telegraphic Transfer (T/T)
This is probably the oldest payment method. Generally speaking, an advanced payment is transferred before production, and the remaining amount according to the terms of payment.
The standard advanced payment amount corresponds generally to 30% of the total amount, and the rest of the balance is paid before delivery or upon completion.
While on one side it is like giving an incentive to the supplier by paying part of the agreed amount, it is true that this payment method does not ensure the pre-paid amount to be recovered (unless you open a dispute).
Of course, common sense suggests paying the deposit after having signed and stamped a Sales Contract and Pro Forma Invoice as well as settling the balance after the results of quality inspection.
- Accepted by the supplier with a bank account;
- Partial reliability about the existence of the company;
- Upfront payment is required;
- No protection or guarantee on the amount already paid
Letter of Credit (L/C)
This is the most common method of paying for goods. It enables the buyer to have the certainty of having fulfilled some pre-determined requirements before the amount is transferred.
It is not a deposit payment, thus the buyer can have a guarantee that the money be transferred in case of non-execution of an agreement, but particular attention should be paid to the conditions under which the payment is to be executed because the bank will automatically transfer the remaining money when the requirements are finally fulfilled.
Generally speaking, it is advisable to authorize the payment when receiving the bill of landing (to be sure that the goods are on the way), approved quality inspection reports and eventually approved tests inspections reports.
- No upfront or deposit payment is required;
- The supplier needs to fulfil some requirements before getting the agreed amount.
- It is seldom accepted for small orders;
- Not all the suppliers accept L/C
Escrow is generally used as a method of payment for small amounts and not for large transactions. There may be different options and the most popular is Alibaba Escrow, which has developed its personal Escrow being one of the most popular and large suppliers. It enables the buyer to have their funds withheld by Alibaba.com until the goods are definitely approved by the buyer himself or herself. It is actually like a L/C. Make sure before you choose this payment option, because this method is not accepted by all manufactures.
- Used for small orders (i.e. samples)
- Not all suppliers accept escrow
XU JIN LIANG . HE XIN . CHEN BING . DENG, “Bank Guarantees and standby letters of credit and Case Studies” (Chinese Edition) - Foreign Economic and Trade University Press– September 2014
Rosemary Coates , 42 Rules for Sourcing and Manufacturing in China (2nd Edition): A Practical Handbook for Doing Business in China, Special Economic Zones, Factory Tours and Manufacturing Quality , Super Star Press (July 19, 2013)
- Negotiation in China: http://www.forbes.com/sites/jackperkowski/2011/03/28/negotiating-in-china-10-rules-for-success/
- The importance of Guanxi: http://www.pon.harvard.edu/daily/international-negotiation-daily/negotiating-in-china-the-importance-of-relationship-building/
- Common mistakes when sourcing goods from China: http://www.forbes.com/sites/allbusiness/2014/01/30/8-common-mistakes-u-s-companies-make-when-sourcing-goods-and-suppliers-in-china/