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 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.
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.
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.
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.
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
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
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