Payment terms are one of the most negotiated — and least understood — aspects of sourcing from China. Getting them right protects your cash flow and limits your exposure. Getting them wrong can mean paying for goods you never receive, or goods that don't match your specifications. The instrument you use (T/T, L/C, escrow), the split you agree (30/70, 20/80, milestone), and the trigger that releases each payment together decide how much risk you carry and for how long.
The Default: 30/70 T/T
The most common payment structure for first-time orders with Chinese factories is:
- 30% deposit by T/T (telegraphic transfer) before production begins
- 70% balance by T/T before the goods are released for shipment
This structure favours the factory significantly. You've paid 30% before you've seen a product, and you have no leverage on the remaining 70% because the goods are sitting in the factory's warehouse — not yours.
Why the Deposit Is Where the Risk Sits
The deposit exists for a real reason: the factory buys raw materials, cuts or amends tooling, and reserves production time on the strength of your order. If you walk away after they have bought components to your spec, they are left with stock they may not be able to sell. A deposit shares that risk. The problem is not the deposit itself but its size and its refundability. A 30% deposit on a custom order is normal; a 50% or 100% deposit on a first order with an unknown supplier is a warning sign, because it moves almost all the risk onto you before you have seen anything.
Treat the deposit as the amount you are prepared to lose if the relationship goes wrong on the very first order — because in a dispute, recovering a T/T deposit from a factory across a border is slow, expensive and often not worth the legal cost. That framing keeps first-order deposits small and pushes you to tie every subsequent payment to a verifiable milestone. The less money that sits with the factory before goods exist and are documented, the less you can lose.
T/T: The Mechanics
T/T (telegraphic transfer, also called wire transfer) is a direct bank-to-bank payment. It's fast, irreversible, and has low transaction fees. It carries no buyer protection — once you've sent the money, it's gone. A T/T typically settles in one to three business days, and your bank and any intermediary correspondent bank each take a fee, so build a small buffer into the amount the factory expects to receive or agree who absorbs the wire charges.
When using T/T, always confirm you're paying to a company account, not an individual's personal account. Personal account payments are a significant fraud risk and are also illegal under Chinese regulations for commercial transactions. Confirm the beneficiary name on the bank details matches the company name on your proforma invoice and contract exactly. A mismatch — even a slightly different trading-company name — is either a red flag or a sign the "factory" is actually a middleman, and both are worth pausing to resolve before you send a cent.
One specific fraud pattern to guard against: mid-order emails claiming the factory has "changed banks" and asking you to wire the balance to new account details. This is the classic business-email-compromise scam, and it is common in China sourcing. Verify any change of banking details through a second channel you already trust — a phone or video call to your known contact — before acting on it, no matter how routine the email looks.
L/C: Letter of Credit
A Letter of Credit is a bank-issued guarantee that the seller will receive payment when specific documentary conditions are met (typically: bill of lading, commercial invoice, packing list, certificate of origin, and any required inspection certificates).
L/C protects both parties: the buyer knows goods must be shipped before payment is released; the factory knows payment is guaranteed once they ship correctly documented goods.
The downside: L/C involves significant bank fees ($500–2,000+ per transaction), requires exact document compliance, and adds 5–10 days to settlement. It's impractical for small orders but sensible for large ones (typically $50,000+).
D/P and D/A: Documentary Collections
Documentary collections (D/P and D/A) sit between T/T and L/C in terms of buyer protection:
- D/P (Documents against Payment): The factory ships goods and sends shipping documents to their bank. Your bank releases the documents (and therefore control of the goods) only when you pay. Moderate buyer protection — you can at least inspect the shipping documents before paying.
- D/A (Documents against Acceptance): Similar, but you receive documents against signing a time draft (a promise to pay on a future date). This is essentially trade credit — riskier for the factory, so harder to negotiate.
Documentary collections are less common than they were because they still require you to trust the underlying goods — the bank checks the documents, not the quality of what is in the carton. They can be a sensible middle path on medium-value orders with a supplier you half-know, but for a genuinely unknown factory they do not remove the core risk that the shipped goods are wrong.
Escrow: Alibaba Trade Assurance and Third-Party Services
Escrow flips the leverage. Instead of the factory holding your money before goods exist, a neutral third party holds it and releases it to the factory only when you confirm the order was fulfilled to the agreed terms. The best-known version for China sourcing is Alibaba Trade Assurance, which is built into orders placed through Alibaba.com: you agree an order contract specifying quantity, quality standard and ship date, pay into the escrow, and the funds release when those terms are met — with a defined dispute process if they are not.
Escrow is genuinely useful for smaller orders and new relationships, because it converts "trust the stranger with my deposit" into "the platform holds it until I'm satisfied." Its limits matter too. The protection only covers what the order contract actually specifies — a vague quality clause gives you little to dispute against — so the contract must be precise about specifications, AQL levels and delivery. Coverage is capped, fees and currency conversion apply, and off-platform side deals (the factory asking you to pay part directly by T/T to "save fees") void the protection entirely. For large custom production, a documentary L/C or a T/T balance released against the bill of lading usually gives more precise, higher-value protection than platform escrow.
Comparing the Payment Methods
Each instrument trades cost, speed and buyer protection differently. There is no single "best" — the right choice depends on order value, how well you know the supplier, and how much you can afford to have exposed:
| Method | Buyer protection | Cost | Best for |
|---|---|---|---|
| T/T (deposit + balance) | Low — irreversible once sent | Low (wire fees only) | Most production orders, with balance tied to B/L |
| Escrow (Trade Assurance) | Moderate — release on your confirmation | Platform + FX fees | Smaller orders, new suppliers, on-platform deals |
| D/P (documents vs payment) | Moderate — inspect docs before paying | Bank collection fees | Medium-value orders, half-known suppliers |
| L/C (letter of credit) | High — bank enforces documents | High ($500–2,000+, plus days) | Large orders, roughly $50,000 and up |
| PayPal / cards | Moderate — chargeback possible | High (~4.4% + fee) | Samples only, not production |
Notice that protection and cost move together. The cheapest method (T/T) carries the least built-in protection, which is exactly why the trigger you attach to it — pay the balance against the bill of lading, not before packing — does so much of the work. You are recreating some of the protection an L/C would give you, for free, by controlling when the money moves.
Negotiating Better Terms
As you build a track record with a factory, you should be able to negotiate improved terms:
- First order: 30% deposit, 70% against copy of B/L (bill of lading)
- After 2–3 successful orders: 20% deposit, 80% against B/L
- Established relationship: 30-day net terms, or even 50% before shipment, 50% net 30 after delivery
The most valuable single change you can negotiate is not a lower deposit but a better trigger for the balance. "70% before shipment" and "70% against a copy of the bill of lading" sound almost identical, but the second means the goods are already on the vessel and documented before your money moves — you have proof of shipment and a passed inspection in hand. Push for that wording first; the deposit percentage is a secondary win.
Volume, repeat business and a clean payment history are your leverage. A factory that has been paid on time across several orders has an incentive to keep you, and that is when net terms or a smaller deposit become realistic. Do not expect them on order one — a supplier who offers unusually generous terms to a brand-new overseas buyer is either desperate for the work or not planning to deliver.
Milestone Payments and the Contract
For larger or custom orders, break payment into milestones tied to verifiable events rather than a simple deposit-and-balance. A workable structure might be: a modest deposit to start tooling; a payment when a signed golden sample is approved; a payment at a during-production checkpoint; and the balance against the bill of lading and a passed pre-shipment inspection. Each release is tied to something you can see and sign off, so your money tracks real progress instead of the calendar.
Whatever structure you agree, put it in a written contract or, at minimum, a detailed proforma invoice that both sides sign. It should name the exact company and bank account, the currency, the milestone triggers, the quality standard and AQL, the ship date, and what happens to the deposit if the factory fails to deliver on spec or on time. A signed contract will not make cross-border enforcement easy, but it defines "a fail" in advance so it is not a negotiation later — and it is the document an escrow, a bank or a marketplace dispute team will actually read.
PayPal and Other Digital Payments
Some smaller factories accept PayPal for sample orders. This provides buyer protection (PayPal disputes are possible) but comes with high fees (4.4% + fixed fee) and currency conversion costs. Acceptable for samples; not practical for production orders.
Protecting Yourself on First Orders
- Use a pre-shipment inspection to verify goods before releasing final payment
- Pay the 70% balance against a copy of the bill of lading, not before shipment begins
- Always pay to the company account matching the company name on your contract
- Keep all payment records and correspondence
None of this is exotic — it is sequence and discipline. Audit or verify the supplier before the first big order, book a pre-shipment inspection on every shipment, and keep the balance payment tied to a passed report. If you are unsure a supplier is even the real manufacturer, confirm it first: our note on verifying a China supplier's business license shows how to match the company name on the bank account to a real, licensed entity before any money moves. And because payment terms interact with who pays for freight and when risk transfers, read them alongside Incoterms for China shipments — FOB, CIF and EXW each change what "before shipment" actually means.
Frequently Asked Questions
What deposit is standard for a China factory order?
For a first order the default is 30% deposit by T/T before production and 70% balance before shipment. As you build a track record you can push the deposit down to 20% and tie the balance to a copy of the bill of lading rather than paying before the goods are packed.
Is T/T or L/C safer for buyers?
A letter of credit gives the buyer more protection because the bank only releases payment when the factory presents compliant shipping documents, but it costs several hundred to a few thousand dollars in bank fees and adds days to settlement. T/T is cheaper and faster but irreversible with no built-in protection. L/C is usually worth it on large orders (roughly $50,000 and up); T/T with a balance tied to the bill of lading is more practical for small ones.
How do I avoid losing my deposit to a China factory?
Pay only to a company bank account that matches the name on your contract, never a personal account or Western Union. Keep the deposit as small as the factory will accept, put milestones and a refund clause in a signed contract, and hold your balance payment as leverage against a passed pre-shipment inspection. Never pay 100% up front.
Should I use escrow like Alibaba Trade Assurance?
Escrow services hold your payment until you confirm the order was fulfilled to the agreed terms, which shifts leverage toward the buyer. They work well for smaller orders and new relationships, but coverage is limited to what the order contract specifies and fees plus currency conversion apply. For large custom production, a documentary L/C or a T/T balance released against the bill of lading usually gives stronger, more precise protection.
When should I pay the 70% balance?
Pay the balance against a copy of the bill of lading and a passed pre-shipment inspection report, not before the goods are finished and packed. Releasing the balance before shipment hands the factory your only leverage; releasing it against the B/L means the goods are already on their way and documented before your money moves.
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