by Fredrik Grönkvist
About to pay a manufacturer in China? The payment method, and the process, often has a major impact on the outcome. In fact, it can spell the difference between success and failure, when buying from overseas suppliers. In this article, we introduce you to four common payment methods, used when transferring funds to Chinese suppliers.
Telegraphic Transfer (T/T)
The Telegraphic Transfer is standard bank transaction, placed either through your internet bank, or in a local bank branch. This payment method is accepted by all Chinese manufacturers with a bank account. Virtually all, that is. Albeit common, it offers no protection by itself, unlike the Letter of Credit, which I’ll get back to in a bit. That is, however, not saying that T/T is necessarily an unsafe payment method.
Paying the right amount, at the right time, is the key to success
The standard payment term is a deposit payment of 30% upfront, before manufacturing, and a balance payment upon completion – but before shipping (or at least, before the original Bill of Lading is issued). The timing of when, and under which conditions, you are making this second and final, payment, is crucial.
It’s all about giving the supplier an incentive to comply with your requirements. By paying the supplier in full, before regulatory compliance and quality has been verified, you take that incentive away. Thus, the balance payment must be withheld until after the batch has been approved by a quality inspector, and after eventual lab test results are back.
While it’s true that this payment method is not protecting the initial deposit payment, the supplier still has much to lose, even with a deposit payment secured. Chinese manufacturers often run on very slim profit margins. Even if they would cut of a buyer making demands, and attempt to sell the batch domestically, they are almost certain to make a hefty loss. The supplier simply has much to lose by not completing the transaction.
Are you paying the right entity?
A Payment fraud is a common, yet simple, scam. The buyer is persuaded into transferring funds to a bank account not held by the suppliers. The fraud is carried out by simply changing the bank details on the Proforma Invoice. The method to do this varies. We’ve seen cases that were most likely carried out by, obviously corrupted, employees.
Other, more advanced, forms of the classic payment fraud involve an outside party hacking the suppliers email account, only to replace the bank details on the invoice and forwarding it to an unsuspecting purchasing manager. As the fraud is carried out using the suppliers email account, often hosted on publicly available emailing services rather than a company owned domain, the fraud rarely raises suspicion on the other side. Sometimes, they even take it further, by diverting email communicating between the actual supplier and the buyer, to ensure that no conflicting communication occurs between the two parties.
As the supplier never received the money, they will, without exception, refuse to ship the goods. Retrieving the payment is close to impossible, as it often take days before the buyer, and supplier, understood what happened. We receive emails from time to time from suppliers, issuing payment fraud warnings – most likely due to a recent case. We’ve also noted that more and more suppliers put their bank account details directly on their B2B supplier directory pages, for example on Alibaba.com.
The scam is successful, as few, even experienced, buyers bother to check whether the account is held by the supplier. The situation is further aggravated by the fact that many Chinese suppliers, for various reasons, request payments to offshore entities – sometimes even privately held accounts. However, that’s a whole other story.
For mysterious reasons, overseas buyers fail to use common sense when dealing with Asian suppliers. I’m quite sure that most American and European buyers would think twice before paying a domestic supplier to a bank account held under a completely different company name, in a different region or even country.
T/T Payment process
1. Deposit payment (30%)
2. Production starts
3. Production completion
4. Quality Inspection / Compliance testing
5. Buyer approves batch
6. Delivery to the Port of Loading (e.g. Shanghai)
7. Bill of Lading Scan Copy provided
8. Loading & Shipment
9. Balance payment (70%)
10. Seller sends original Bill of Lading and other freight documents (required to release cargo in
Port of Destination)
– Recommended division between deposit and balance payment: 30% Deposit (Before Production) / 70% Balance (After Production)
– Never pay the deposit before you have a signed and stamped Sales Contract & Performa invoice.
– Never pay the balance before you have completed any Quality Inspections (in China) or received Product Test results (for example REACH, RoHS and CA Prop 65)
– Never prepay 100% before production. By doing so, you remove the suppliers incentive to remake or repair defective or non-compliant items.
– Most Trading Companies also require you to pay a deposit about 30 days before delivery to Port of Loading (in China). The reason is simply that most Trading Companies in China don’t have ready-made products in stock but is rather subcontracting your order to a local factory.
Letter of Credit (L/C)
Unlike T/T, a Letter of Credit enables the buyer to add an extra layer of security, by forcing the supplier to fulfil certain, pre-determined, requirements before the funds are transferred. The key point here is that no deposit payment is required, which vastly reduce the risks on the buyers side. The question, when paying by Letter of Credit, is under which conditions the payment shall be ‘released’. The bank will automatically release the funds to the supplier, and then credit the buyer, automatically once these conditions has been fulfilled.
Bank personnel are not industry experts. Once they have received the required documentation, the money is transferred. It’s entirely up to the buyer and seller to negotiate which specific documents the latter must provide, before the transaction is made. A few examples of such conditions are listed below:
- Bill of Lading (issued on or before a certain date, to avoid delays)
- Approved Quality Inspection Report/s (to avoid shipment of defective items)
- Approved Laboratory Testing Reports (to avoid shipment of non-compliant items)
Yet, far from all manufacturers in China, and other Asian countries, accept payment by Letter of Credit. Click here to learn more about Letter of Credit payments, when importing from China.
L/C Payment process
1. The seller and buyer sign a Sale Agreement that states the conditions that must be fulfilled before the payment shall be released
2. The buyer contacts its local bank and applies for an L/C
3. The buyer’s bank contacts the seller’s bank (in China) and presents the Letter of Credit
4. The sellers bank contact the seller and presents a payment advice
5. Production starts
6. Production completed
7. Quality Inspection & Product Testing
8. Delivery to the Port of Loading and Shipment
9. The provides the required documentation to their local bank (e.g. Quality Inspection Report, Test Report and Freight Documents)
10. The funds are released, if the conditions are fulfilled (i.e. the right documents are presented)
Alibaba, the world’s largest B2B supplier director, has it’s own payment system in place. The Alibaba Escrow service enables buyers have their funds withheld by Alibaba.com, until the goods has been ‘approved’ by the former. Sort of like a poor mans Letter of Credit. Personally, I have never used this payment method on behalf of a client, and nor am I aware of any importing business using it.
I assume that Alibaba Escrow is primarily used for micro transactions only, and I am not sure how flexible the conditions are when it comes to ‘approving’ the goods, before the payment is released. A complete FAQ about this payment method can be found here.
PayPal payments are suitable for samples orders – or very small orders. Due to the relatively high transaction fees (around 3.4 – 4.4%), this payment method is never applied to ‘real orders’. I’ve found that Chinese PayPal accounts are rarely held by the actual company entity, even though Chinese companies can set up business PayPal accounts. Personally I have not explanation to why this is the case.
Payment Method Comparison
|T/T||1. Accepted by all suppliers with a bank account
2. Low cost
|1. Requires an upfront deposit payment
2. No payment protection
|L/C||1. No deposit payment required
2. Puts pressure on the supplier to comply with buyer requirements
|1. Rarely accepted for very small orders (e.g. Below $30,000)
2. Not accepted by all supplliers
3. High fees
|Alibaba Escrow||1. Integrated with Alibabas supplier directory
2. Funds are withheld by Alibaba until the buyer approves the goods
|1. Not accepted by all manufacturers
2. Mostly used only for very small orders
|PayPal||1. Suitable for very small transactions (e.g. Sample orders)
2. Fast. Payments arrive instantly.
|1. Not accepted by all suppliers
2. High fees