The fundamental dynamics of international trade are based on the exchange of goods and money. How and when the payment will be made determines the risk level of the buyer and the seller. China is the world's largest market for both consumer products and inputs to manufactured goods, and this large scale opens up a range of payment options for importers. One thing does remain constant though throughout - merchants should avoid cash payments in favor of standard payment methods and fund transfers in China.

Importer companies should also conduct careful and detailed research, especially for the products imported from China, diligently analyze all details about the market, suppliers, and product range. China is a country where you can find many manufacturers and products in different quality and price segments, even in the rarest product groups. Are you familiar working with Chinese manufacturers? Do you know how to manage the importation process?

Negotiation Process and Payment Method Relationship

Suppose an importer wants to place an order with a Chinese manufacturer. He needs to anticipate the entire process from production to receiving the goods and evaluate the most appropriate payment method. The manufacturer's reliability, production techniques, capacity, quality process, references, etc., should be analyzed carefully focusing primarily on the product and sales process, including customs and transportation.

If you are purchasing a finished product/stock item from a Chinese supplier, then after an inspection you can pay in cash. For example, by a Bank Transfer (T/T), PayPal, or other method. The starting point should be to clarify which features and components of the product are promised. For example, if you have received an offer for a garment product.

However, you shouldn't compromise on basic information such as the structure of the materials used in the product, mix ratios, texture, color, size, sewing and cutting technique, and type of packaging. All details should be written in the agreement you sign, including payment. We typically see the payment method of something like "30% before production, 70% based on bill of lading" as the most preferred payment method for exporters in China.

Secure Payment Methods

When you deal with a Chinese manufacturer, record the company's trade name, tax number, address, and bank account information. Then, prepare a sales contract containing all your company's information along with the Chinese manufacturer's, and create an import file by adding the proforma invoice to be prepared by the company. Finally, use the bank information written in the contract and proforma to make the payment to the Chinese company.

If you receive an email from the company that the bank information has changed, or if you notice that the bank information in a revised proforma has changed in routine correspondence, confirm this by calling the company officials. Payment fraud by hacking company emails is unfortunately common.

Payment Method and Risk Sharing

We can consider payment methods under two headings: the payment method and the channel through which the payment is made.

Payment Channel

The channel through which the payment is made can accommodate different payment systems, basically used through a bank channel. Payment methods such as Bank Transfer (TT), Western Union, Paypal, Payoneer, Visa (Credit card) are all cash payments made through different banking channels. The payment method is the same, but the payment channels are different. Payment methods such as Paypal and Payoneer can be used chiefly for B2C commerce or small-scale B2B commerce. The main reason for this is that the % commission in these payment methods is costly for large-scale money transfers.

Payment Methods

All payment methods take place in the form of bank transfers. The difference between them is the time of payment, or whether the payment is made based on certain conditions. In general, every exporter wants to work with cash payment, and the importer, if possible, with a long-term payment plan, against goods. There are many factors such as mutual trust of companies, industry norms, supply-demand balance, and the financial structure of companies and financial risk policies.

Chinese exporters generally prefer to work with the pre-production down payment and the remainder at the shipping stage. The payment may be received in several parts.  After all, this method is in the status of advanced payment since the entire payment is made before the exporter receives the goods.

Cash/ Advance Payment

In this form of payment, the buyer (the importer company) pays the entire cost of the goods in advance when placing an order or before shipment. The exporter can make a part of the payment before production, some at the end of the output and inspection stage, and the remaining balance is based on the bill of lading. The payment process entirely depends on the agreement terms between the exporter and the importer. For exporters in China, upfront payment before production is essential for pre-financing and securing orders. Therefore, as mentioned the common practice is 30% payment before production and 70% at the shipment stage.

This form of payment does carry risks for the importer. The risk is even greater if the total price is paid before production. For example, a front company may disappear after receiving an upfront payment. If the goods are received by making a cash payment at the shipment stage, there are negative potential outcomes such as poor quality products or missing material. Since the importer has made the payment initially, he does not have any further assurances. It goes without saying that in international trade, seeking legal rights is a costly and uncertain process.

Cash Against Goods

It is the riskiest form of payment for the exporter. Most Chinese manufacturers do not prefer this method. However, it can be preferred in cases where deferred payment applications are typically due to large-scale companies or the industry. In this payment method, the exporter and the importer agree on maturity. The maturity may expire when the exporter receives the goods or cover periodic maturities of 30, 60, or 90 days. This payment method usually is risky for the exporter. Still, sometimes exporters may grant long-term maturities to importers who offer collateral with a bank letter of guarantee or bank policy. Apart from the risk factor, in contrast to the cash payment method, the exporter finances the importer in the cash against goods method.

Cash Against Documents

This payment method is not among the payment methods preferred by Chinese manufacturers. The process works just like the "Cash against goods" method. The exporter completes the production, makes the shipment, and delivers the export documents to its bank. The bank of the Chinese manufacturer sends the export document set (BL, invoice, packing list, Certificate of Origin, etc...) to the importer's bank with the phrase "CAD payment" and a "remittance letter." The importer can only receive the documents from his bank if he pays the export invoice amount. Since the importer company needs these documents for customs clearance, they cannot get the goods from the customs without payment. "CAD" is a secure payment method, but if the importer does not receive the documents and does not withdraw the goods, for example, rejects the goods, the loss will be significant for the exporting company.

Letter of Credit - L/C

A letter of credit (L/C) is the most guaranteed payment method for both exporters and importers. A L/C is an agreement between the exporter and importer's banks. It works as follows: per the sales contract and pro forma invoice prepared between the exporter and the importer company, the importer company has its bank prepare a letter of credit. Then, the importer's bank, "Issuing Bank," transmits this letter of credit to the exporter's bank, "Advising Bank."

We can essentially define a letter of credit as a "conditional transfer." In the letter of credit, the invoice amount, the validity period of the letter of credit, the last date of shipment determined for the shipment, the delivery address, the list of original documents to be delivered with the letter of credit, and the content of additional documents such as insurance certificate and inspection certificate required by the importer are specified.

The exporter company completes the production per the letter of credit. Inspection is carried out if requested. After the shipment, it prepares all the documents listed in the letter of credit and delivers them to its bank. If the documents are complete, the importer's bank makes the payment to the exporter's bank within say three days. However, if there are deficiencies, the bank asks the exporter to correct them.

Can Chinese Manufacturers be paid in RMB

In the case of payment in RMB (Chinese Yuan), importers can profit when the transfer takes place at a higher exchange rate than USD payments. But since the RMB is not a convertible currency, the countries where RMB payments can be made are limited. RMB payment is possible, for example, from companies based in Switzerland or Hong Kong. However, USD and EUR are the most widely used currencies for the remaining countries. As a recommendation, US and European companies can transfer renminbi through a clearing bank in Hong Kong or a correspondent bank in Mainland China, allowing exporters to present themselves with a lower export invoice.

Lacking eyes and ears on the ground to help you vet the business partners you work with? Let us help you do basic due diligence to better understand your risks with suppliers, distributors, and other parties. 

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