COMMENT: Essential tips for China sourcingby ASC Staff on Nov 13, 2016
Often, companies wanting to source products from Chinese manufacturers have questions about which method of payment should be preferred, especially when they come across news of buyers being duped, payments not reaching the intended party, shipment of defective goods, or goods not released for shipment in spite of full payment done.
Here is a brief guide to some of the popular payment options available while sourcing from China:
1. Telegraphic Transfer
This is a standard bank transaction made via internet banking or local banks, accepted by virtually all Chinese suppliers and exporters.
• Standard split payment for telegraphic transfers is 30% deposit and 70% balance. The deposit amount can be negotiated down, in consecutive orders and/or if the company has leverage by way of being a well-known brand or one with a local office in China.
• Preferably, the balance amount should be paid after the pre-shipment inspection of the goods (quality check and product testing), to avoid shipment of defective goods. This also acts as an incentive for exporters and sourcing suppliers to deliver goods on time.
• There is no payment protection with a telegraphic transfer, but this is still quite a common method of payment. It’s best reserved for suppliers you trust, and to ensure that the payment safely reaches them, establishing direct communication should be preferred, via a trustworthy procurement agent or through a local office in China.
• Don’t just rely on email communications. Some scams in recent times have involved emails being hacked and wrong bank details being furnished, in which case the amount cannot be recovered and the supplier will refuse to release the goods due to non-receipt of payment.
2. Letter of Credit
You can apply for a Letter of Credit at a local bank, which forwards it to the supplier’s bank in China explaining the terms and conditions for release of payment. The supplier’s bank then explains the payment process to the manufacturers or exporters.
• Payment is only released when the necessary documents are furnished, like the bill of lading, pre-shipment quality check report, test report, freight documents, etc.
• There is no upfront payment, so it is risk-free from the buyer’s perspective, but may not be accepted by all suppliers.
• It is safe but often very costly, and used mostly for orders above $30,000.
3. Payments in Escrow
Some B2B supplier directories like Alibaba and websites like escrow.com offer escrow payments for small orders, and do not release payment until the goods have been verified by the buyer. This mode of payment is not accepted by all Chinese exporters, and can get expensive for larger orders since the “middleman” takes a cut for the service.
This mode of payment is typically used only for small orders or samples, since transaction costs are quite high. However, the benefits include instant transfer of funds, and easy processing between multiple currencies, which are automatically converted to the local currency.
How Can a Sourcing Agent Help You with Payments?
The most important thing to keep in mind while sourcing from China is that unless you have a lot of experience, it’s best to turn to a procurement agent or sourcing company to help keep your money safe. This is especially crucial if you’re placing large orders or multiple orders, and do not have the time to keep track of them yourself.
Using the services of a sourcing specialist or company that can hold payments in escrow offers multiple benefits. It increases supplier trust, a third party is holding the payment instead of the buyer, and increases safety for buyers too, since they know that the payment will only be released according to the agreed terms.
About the author:
As the director at Excella Worldwide, Shruti Agrawal is a strategist with an Electronics Engineering background and always on the lookout for ways to challenge and disrupt business models to make them better.