Payment Terms When Sourcing a Product From China
Introduction:
When it comes to sourcing products from China, one of the most important aspects to consider is the payment terms. The payment terms are a crucial factor in determining the success of your sourcing experience, and it is essential to understand the various options available and the risks involved.
In this article, we will explore the different payment terms when sourcing products from China and provide insights on how to make the best choice for your business.
Understanding Payment Terms:
Payment terms refer to the agreement between the buyer and the seller on when and how payment will be made. When sourcing products from China, there are several payment terms that you should be aware of:
1. Advance Payment:
Advance payment is the most straightforward payment term, where the buyer pays the full amount upfront before the shipment is sent. This payment term provides the seller with the assurance that the buyer is committed to the purchase and reduces the risk of non-payment. However, this payment term also presents risks to the buyer, as they have no leverage if the seller fails to deliver the goods or delivers faulty products.
2. 30/70 TT
Many Chinese manufacturers have developed a standard form of payment that is commonly known as 30/70 TT. This payment term is widely used in the manufacturing industry, especially when sourcing products from China.
3. Letter of Credit:
A letter of credit (LC) is a payment term where the buyer’s bank guarantees payment to the seller upon the delivery of goods that meet the agreed-upon terms and conditions. The LC serves as an intermediary between the buyer and the seller, ensuring that both parties’ interests are protected. However, the process of setting up an LC can be time-consuming and expensive, and it requires careful attention to detail to avoid disputes.
4. Open Account:
Open account is a payment term where the buyer pays the seller after the goods are delivered. This payment term provides flexibility to the buyer and allows them to inspect the goods before paying. However, this payment term presents a risk to the seller, as they have no guarantee of payment if the buyer defaults or delays payment.
5. Cash on Delivery:
Cash on delivery (COD) is a payment term where the buyer pays the seller upon the delivery of the goods. This payment term provides the buyer with the assurance that they will receive the goods before paying, but it presents a risk to the seller, as they have no guarantee of payment if the buyer refuses to pay or defaults.
Choosing the Right Payment Term:
Choosing the right payment term when sourcing products from China depends on several factors, including the size and complexity of the order, the level of trust between the buyer and seller, and the level of risk tolerance.
For small orders or when dealing with a new supplier, it may be best to opt for an advance payment or an LC to reduce the risk of non-payment. For larger orders or when dealing with a trusted supplier, an open account or COD may be a viable option.
What is Most Common Payment Term in China?
30/70 TT payment term is a payment method commonly used in international trade. It involves the buyer paying a 30% deposit upfront upon placement of the order, and the remaining 70% is due on shipment of the goods. This payment method is extremely popular among Chinese manufacturers and suppliers as it provides them with a guarantee of payment before they begin production.
Advantages of 30/70 TT Payment Term:
The 30/70 TT payment term offers several advantages to both buyers and suppliers. Some of these advantages include:
Reduced Risk: By paying a 30% deposit upfront, the supplier is provided with a level of assurance that they will receive payment for their goods. This reduces the risk of non-payment, which is a common concern for manufacturers and suppliers.
Improved Cash Flow: The deposit payment upfront provides suppliers with a cash flow advantage. This enables them to purchase raw materials and start production without having to wait for the full payment.
Clear Payment Terms: The 30/70 TT payment term offers clear payment terms, which reduces the potential for misunderstandings or disputes between the buyer and supplier. Both parties are aware of the payment timeline, which provides transparency and clarity.
Incentive for Timely Shipment: The remaining 70% payment is due on shipment, which provides an incentive for suppliers to ship the goods on time. This ensures that both parties are satisfied with the transaction and receive what they expect.
Risks of 30/70 TT Payment Term:
While the 30/70 TT payment term offers advantages, there are also risks involved. Some of these risks include:
Quality Control Issues: The 30/70 TT payment term may result in quality control issues if the buyer is not able to inspect the goods before shipment. This can result in receiving faulty or low-quality products.
Non-Delivery of Goods: The deposit payment upfront may not be enough to ensure that the supplier will deliver the goods as agreed. The remaining 70% payment is due on shipment, and there is a risk that the supplier may not ship the goods or delay the shipment.
Currency Fluctuation: The 30/70 TT payment term involves transferring funds in foreign currency. This presents a risk of currency fluctuation, which may affect the price of the goods.
Conclusion:
In conclusion, payment terms are a critical aspect to consider when sourcing products from China. Understanding the different payment terms available and the associated risks and benefits is essential to making the best choice for your business. The 30/70 TT payment term is the most common payment method in China and offers advantages such as reduced risk, improved cash flow, clear payment terms, and an incentive for timely shipment. However, it also presents risks, including quality control issues, non-delivery of goods, and currency fluctuation. Choosing the right payment term depends on several factors, and it is crucial to evaluate the size and complexity of the order, the level of trust between the buyer and seller, and the level of risk tolerance. Ultimately, selecting the right payment term is crucial to ensure a successful sourcing experience and build a long-term relationship with suppliers in China.
