Paying Your Supplier Deposit
To begin the production your supplier will request the initial 30% deposit.
When importing from China or from any country, there is no one “Best” Payment Method.
It all depends on many factors, the most important being the amount of payment being sent.
In this module we will look at various payment methods that are often used by importers. We will consider their popularity, levels of risk and also how acceptable they are to the Asian suppliers.
1. Telegraphic Transfer (TT)/International Wire Transfer
This is probably the oldest payment method in international trade after the barter system and one of the most frequently used when dealing with low to medium end transactions. Normally an advance payment is sent before production and the balance as per the payment terms. The main risk for the importer is losing the advance in case things go wrong.
Potential Payment Hazard for Suppliers: Situations may occur where the buyer for some reason or another is unable to pay the outstanding balance or loses interest in completing the bulk product purchase. Popular products may not be an issue as they can be offloaded to a future buyer however more unique or customized products will be harder to shift and the supplier could find themselves stuck with the batch. This is one of the main reasons why suppliers often request higher deposits for customized or unique products.
Acceptance by Suppliers: This is the most popular payment method.
Top Tip: Often it is faster and cheaper to use an online broker rather than a high street bank when sending a TT & requiring currency exchange.
OFX is a reputable currency transfer agent which is commonly used. They have worldwide coverage. Rates can be found here.
2. Letter of Credit
A “Letter of Credit” is one of the most popular options when it comes to reducing payment risk. Especially for transactions exceeding £50,000.
Letters of Credit may not be a realistic option for smaller importers, due to:
- Exorbitant Bank Charges
- Bureaucracy. Complex terminology and procedures. We advise using a Certified Documentary Credit Specialist to ensure compliance and to assist you with any unforeseen issues at least for the first few transactions. Here is a link to a British website with certified specialists in multiple countries: http://cdcs.libf.ac.uk/registry
- Smaller factories (which can often have attractive prices) may not be comfortable with letters of credit due to language barriers.
A major benefit of LD’s is that their use opens up a range of financing options.
Supplier Acceptance of LC’s: Large and medium sized suppliers and traders will usually be happy to accept LC’s. Small manufacturers especially in China may not accept their use.
3. Online Escrow
Escrow is an extremely appealing method and the equivalent of a a letter of credit for smaller purchases. Escrow often comes with fees which can become a large expense, this is one of the reasons why escrow is therefore usually only used for transactions below £5000.
Alipay Escrow is a widely used escrow service owned by China’s Alibaba group. Although credible there are many horror stories regarding their dispute resolution processes. Customer service can also be less than perfect. However these are issues that can be resolved in the future. Before moving ahead with this option it may be a good idea to test their support by asking them any queries that may impact your decision.
Another point to look out for is being sent bad quality merchandise but still paying the balance due to the “proof of dispatch” document being produced. Much the same as LC’s the financial institutions and agents are only interested in the correct documents being produced for release of payment and to seal the deal.
Escrow Acceptance by Suppliers: Chinese escrow providers are generally widely accepted in China. Overseas providers such as escrow.com are accepted by the larger suppliers however not all.
4. Sourcing Companies/Agents
This is ideal solution which gives maximum peace of mind. Sourcing companies / sourcing agents play the role of gatekeeper. This is one of Ultimahub’s primary services. We receive payment from the supplier and purchase the orders ourselves with the suppliers. In addition to our often being able to negotiate better deals with the suppliers we ensure that no money is exchanged until the products have been received by our and verified.
Once we receive the goods we can pay immediately using “Cash on Delivery” or one of our pre-agreed Chinese payment methods. As we are based in China should the goods not conform to the terms of the agreement they can be rejected without payment being released. This is not available for overseas addresses.
Acceptance by Suppliers: Generally accepted by all suppliers.
Paypal is a very popular payment method however it does come with fees and makes it less attractive for large amounts. Ecommerce sellers typically use this method for smaller amounts due to Paypal fees being calculated as a percentage of the total amount.
Suppliers may also pass on the fees to the buyer if they do accept them. This can also include currency conversion rates which also add up significantly for larger purchases.
Paypal does offer “buyer protection” however it has received bad publicity of late as buyers are finding that it is difficult to win claims from overseas providers. Paypal is a handy tool for small quantities and definitely when purchasing samples, using it for anything else could severely affect your margins.
Finally, due to China not being a popular payment platform in China it is often the case that China suppliers will use individual accounts or accounts in Hong Kong. This makes it difficult should there be any disputes.
Acceptance by Suppliers: For small quantities, amounts and samples there should be no problem with acceptance. Anything larger will generally not be accepted by suppliers.
Note: Paypal can give rise to risks for suppliers also as paypal can claw back payments after goods have been dispatched should the buyer win the paypal resolution process.
Cash works well in China, even for large transactions. In addition it also opens doors to negotiating better prices.
Cash is risky for importers as if anything goes wrong there is little they can do in the way of comeback. Ideally cash should only be utilized when there is a degree of trust already established with the manufacturer and amounts are small.
Cash Acceptance by Suppliers: Generally high among smaller manufacturers but low among larger enterprises especially if state-owned.
7. Western Union
Western Union is considered high risk for buyers as payment is generally made to an individuals account. Should they disappear there is little recourse. WU is often the chosen payment receipt method for fraudsters and scammers.
There is much discussion online that if suppliers request payments by WU then alarm bells should ring and they should be avoided. This is not always the case though as often suppliers chose them due to the favorable charges and speed of money receipt.
Acceptance by Suppliers: Due to the speed and low charges, extremely high. Also preferred to Paypal for product sample payments.
8. International Credit Cards
Factories typically do not accept payment by credit card due to the high risk of charge-backs and also expensive charges.
For the same reason sourcing companies and agents will also refuse to accept credit cards especially for large amounts.
See you in the next module.