Negotiating preferred payment terms with Chinese suppliers is a big concern for buyers. “How much deposit is normal? When to pay the balance? Why won’t supplier accept “looser” payment terms? Can’t they trust me?” Let’s shed some light on this topic.
What are standard payment terms and when to make?
From my stand point and line of work, standard payment terms, to start numerically are 30% deposit and 70% balance.
Once the sample is signed-off, purchase order issued, supplier gives their invoice, THEN it’s time for money to change hands. Generally this looks like a 30% transfer to the vendor.
After you issue your PO, don’t assume the supplier moves forward based solely on a PO. Starting the process based only on a purchase order, is generally a favorable term that you may not have yet.
Make sure your purchase order and the supplier’s invoice (or contract) match up. Go back to the well if there are discrepancies, don’t proceed with deposit. If your PO has a term that the supplier’s document doesn’t have, the supplier will use that as a reason to say later, “this wasn’t considered in the order” or price or whatever.
What are favorable payment terms?
Some examples of favorable terms are the following:
- 20% deposit and 80% balance. If you want to work in increments in “favoritizing” your terms, this is generally the next step up from 30/70. I made up that word “favoritizing” by the way. Don’t copy it.
- Starting production based solely on a purchase order. A large number of China suppliers, the purchase order is just that, the purchase order. They view the deposit made on their invoice/contract, the important phase.
- When the supplier requires the balance? Most 30/70 terms, at FOB, if you’re new with the supplier, the supplier’s hoping you’ll pay before the goods leave the factory. A large chunk are more professional and know that true FOB isn’t complete until goods hit the vessel, thus they know that’s when the payment should change hands.
- Balance payment due once the goods hit port of destination.
- Balance payment due once the merchandise is delivered to-door.
- Even better, balance payment 30 days after the goods are received. This is net-30. To go even higher, into a larger realm of credit favor, is net-60.
If the supplier quotes you FOB China port, do your best to insist that balance payment is due once the goods are on the vessel and they give you the scanned copy of the on-board bill of lading. An on-board bill of lading will have the freight-line stamp with date.
The more you order with the same vendor, the more you pay invoices on time, the more likely the vendors will extend favorable terms.
By the way the on-board bill of lading is also a document required if you are doing a letter of credit (L/C). As you see, I’m not focusing on letter of credit in this post, but sticking to wire transfer.
Why do China suppliers seem to be sticklers on payment terms?
- Whether justified or not, China has large trust issues. Domestically, business persons spend a lot of time chasing down payment from buyers. There’s a large distrust towards fellow citizens when it comes to paying bills.
- If payment doesn’t come through from an international buyer, it’s next to impossible to pursue action through the courts.
- Something happens while the goods are on the water, like a typhoon. Parent company of the buyer goes bankrupt and the buyer cannot pay their balance invoice. It happens.
- Vendors feel that if the goods left their factory, they fulfilled their agreement. From the factory’s standpoint, there’s no concern with quality issues once goods depart. The buyer may want to withhold payment in order to further confirm quality but the factory feels QC should’ve been fully confirmed prior to departure.
- Factories need their cash. They have to pay their vendors, their staff and overhead. If you’re working in low-cost industries, the factories’ margins aren’t large enough to weight 60 days for a $50,000 balance..for example.
Traction helps create favorable payment terms
Perhaps buyers think because they’re from a Western country or because they do so much in sales, then this should immediately translate into credit and favorable terms.
But to a supplier in China, until they’ve started seeing more action and less talk, the biggest company and the smallest company might as well be the same. There are small companies that pay on time and frequently order.
There are large companies that don’t pan out and when they do order, aren’t prompt at fulfilling terms.
And vice versa.
The more you order with the same vendor, the more you pay invoices on time, the more likely the vendors will extend favorable terms…or even agree to accept lower volume orders.
Don’t let payment term talk be held to the end or delay a shipment
Here’s a brief scenario. Payment terms are not clearly defined from the beginning. The buyer pays the 30% and assumes they can pay the balance once the goods are on the water.
Come time for the goods to depart the factory, the factory says they want their payment but the client figured it was suitable to pay once the goods hit the high seas.
The factory won’t budge and the client isn’t able, for whatever reason, to quickly make the payment in order to hit the shipping date.
Factory departure is delayed, goods don’t hit the port on time, sailing date is missed and shipment leaves late.
Relationship between client and supplier takes a bit of a blow; not to mention you missed your promised delivery date and have to explain that to your client or manager.
Stamp out payment terms way in advance and avoid this.