How to pay a Chinese supplier ?

The objective of this article is to share our international paymen experience of Chinese suppliers.

Means of payments to Chinese suppliers

To pay your orders in China, two prefered solutions:

  • Bank transfer (T/T)

It is by far the most common mean of payment, it has the advantage of being quick and simple and relatively not too expensive. An international transfer cost is minimum 50 Euro/USD. Usual payments are made under the “SHARE” term which means customer and supplier will both pay half of it (25 Euro/USD). For some small payments supplier may ask for the payment to be done under “OUR” term, in which case customer will pay 100% of transfer costs.

Please take into consideration that it will take 3 to 5 days for the supplier to actually receive the payment on his account.

Disadvantage of this method is even if the payment can be tracked and proved, there is no warranty if Chinese supplier business is based on deception, scam or the quality of goods have issues.

! Attention, in order to avoid delaying and paying more bank costs be sure that the complete name of the supplier appears on the bank slip, in case the space given to the name is not big enough, you need to write the full name in the commentary section. Chinese banks do check the names and will not accept to pay if any letter or word is missing or misspelled.

  • Letter of Credit (LC)

Due to it’s costs (consider between 200 & 500 Euro / USD) and it’s complexity to use, it is a solution to consider only for business of important amounts.

Letter of Credit is a warranty given by the bank of the customer to the bank of the supplier that if certain documents are provided payment will be made.  Documents can include logistic documents (to validate the reality of an expedition), third party control (validate quality & quantity of goods) and are usually limited in time.

The whole process is very “administrative”, you should therefore not be afraid of paperwork and pay a lot of attention to documents details.

There are other ways of payment like Paypall or Alipay (amongst more), but they are more directed to B to C solutions than B to B.

Chinese companies bank accounts particularities

Paying suppliers in China can be a headache, government do have a very tight control over bank transfers and particularly for those including foreign currency. Chinese legislation only allow the company that declared the exportation of goods to receive the foreign transfers.

 

In order to be able to export, a Chinese company need to have a Import /Export License which is not so common even for big companies. If the company doesn’t owns a Import / Export License she can use the services of a Import / Export agent who will be in charge of the documentation and will need to receive the international payment on its own account.  It is so not rare if you send an order to a company called “Wang Manufacturing Limited” to receive an invoice from a company called “Lee Import & Export Limited”,  the trading agent after receiving the foreign currency will transfer the payment in RMB to the manufacturer.

In some cases, suppliers may send an invoice from a Hong Kong company, in these cases it is often a trading company, Hong Kong companies not being able to act as an Export agent in mainland China, they act as intermediaries. (often to hide the name of the exporter)

It is also possible that the account on the invoice refers to a personal account, this is particularly seen for tooling fees, tooling not being exported there is no need of export authorization and this enables company not to pay taxes. These payments are illegal in China, we therefore don’t recommend to proceed.

Usual payment terms with China

Same with next door suppliers, payments terms will first depend on the trust relation between the buyer and the supplier and negotiating skills. Nevertheless, please find below some general remarks :

For a first payment, it will be difficult to make the supplier agrees to anything else than a 100% before expedition.

For toolings, classic payments terms are 50% at the order and remaining 50% after sample validation, knowing that if the samples are never to be ok if will be very difficult to get the first 50% back.

For parts it is very common to have payment terms 30/70 : 30% at the order, remaining before expedition, against document ( expedition is done, but in order to be able to claim the goods after arrival in the destination port, customer will need to receive the original Bill of Lading, document which will only be released after full payment of the order) or in some case after goods reception by the customer.

In order to understand the difficulty chinese suppliers agree to payement after reception of goods, it is important to remember that maritime freight between China and Europe will last for 30 to 45 days. In the case of a payment Net 60 days it means the supplier will only be paid 3,5 month after shipment with usually on top of that a currency risk.

Don’t hesitate to contact us for information on dealing with production / suppliers in China.