How you pay a Chinese factory is as consequential as what you pay them. Payment terms define risk allocation between buyer and seller, influence your working capital requirements, and — in larger transactions — can meaningfully affect the price a factory offers. Understanding the main options and when each applies is fundamental to managing a China sourcing relationship professionally.
T/T (Telegraphic Transfer): The Default for Most Buyers
T/T (bank wire transfer) is by far the most common payment method in China trade. The typical structure is 30% deposit before production, 70% balance before shipment. Variations exist: 50/50 for first orders or high-risk suppliers; 100% before production (avoid this); or 30/70 with the balance released against document copies before the originals arrive (offers slight buyer protection).
T/T is simple, fast, and low-cost. It is also entirely dependent on trust — once money is wired, the buyer has limited recourse if the factory fails to deliver. This is why the standard structure keeps the larger balance in the buyer's hands until the factory has demonstrated performance (goods produced and ready to ship).
Letter of Credit (L/C): For Large Orders and New Relationships
A Letter of Credit is a bank-intermediated payment instrument where your bank (issuing bank) guarantees payment to the factory (through their bank, the advising/negotiating bank) provided the factory presents specified documents confirming the shipment was made as agreed.
L/C protects both parties: the factory is guaranteed payment if they perform; the buyer is protected because payment is conditional on document presentation (bill of lading, commercial invoice, packing list, certificates of origin, inspection certificate if required).
L/C is appropriate for: orders above $50,000–100,000 with a new supplier; situations where the factory specifically requests it (often larger factories with many buyers who prefer predictable cash flow); or markets where T/T transfers face regulatory restrictions.
L/C Costs and Complexity
L/C is not free. Issuing bank fees typically run 0.1–0.5% of the L/C value, with minimum charges. Amendment fees apply if terms need changing after issuance ($50–200 per amendment). Document discrepancy fees apply if the factory's presented documents don't exactly match the L/C terms — discrepancies are very common and the factory bears these costs, but they slow payment.
The documentation requirement is exacting. Every field on every document must match the L/C terms precisely — a misspelled port name, wrong container number format, or wrong date format can create a discrepancy. Factories experienced with L/C have document preparation systems in place; new-to-L/C factories may struggle.
Other Payment Methods
D/P (Documents Against Payment)
The factory ships goods and presents documents (including the original bill of lading) through their bank to your bank. You pay to receive the documents, which give you control of the cargo. Offers moderate buyer protection — you don't pay until documents are presented — but the factory bears shipment risk. Used primarily in established relationships.
Open Account
You receive goods and pay after. Common between established trading partners in the same market, extremely rare in China trade for new relationships. Factories are not in the business of providing buyer credit to unknown overseas customers.
Trade Finance / Supply Chain Finance
For larger buying organisations, bank-facilitated supply chain finance programs can extend payment terms while ensuring factories receive early payment via the bank. Programmes like buyer-led SCF (reverse factoring) are used by major retailers and brand owners sourcing at scale from China.
Practical Recommendation
Start new relationships with 30/70 T/T. After 3–5 successful orders demonstrating consistent performance, you may renegotiate to longer balance release windows or better terms. Reserve L/C for large first orders with unverified suppliers or when the factory specifically requires it — the added complexity is rarely worth it for orders below $50,000.
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