Many potential Western importers often pose the same question repeatedly on the internet: “What is the best way to pay my Chinese suppliers?”
The answer is not straightforward because each payment method comes with its advantages and disadvantages, largely depending on the size of your order. We’ll discuss these methods shortly.
However, it’s crucial to adhere to the following golden rules:
- Never make payments to personal accounts: Always insist on the detailed corporate account information of the company handling your business. Avoid excuses for sending money to personal accounts unless you’re ready to part with your money or the promised goods.
- Draft a robust agreement: Ideally, before making any payments to potential suppliers, ensure your interests are safeguarded by drafting strong payment terms within the agreement you sign with them. These terms encompass the choice of payment timing and method.
Now, let’s delve into the various payment methods that individuals purchasing or manufacturing products from China can use to pay their suppliers, along with their pros and cons.
1. International Wire Transfer
This is a broad term involving the electronic transfer of funds from one place to another via networks of banks and transfer institutions worldwide. This includes interbank transfers and transfers handled by companies like Western Union (which we’ll detail later). Interbank wire transfers are one of the most common payment methods. It’s best to use this if you’ve done some due diligence on your supplier, such as verifying they are a legitimate business with a registered entity.
This payment method is widely accepted by both buyers and sellers. However, the fees can be relatively high, as you need to consider the bank’s exchange rates (which are rarely in your favor) and pay fixed fees for each transaction. The recipient may also have to pay some fixed charges upon receiving the money. Given that these transactions may take two to five business days to process, there’s a risk of currency exchange rate fluctuations from the day you sign the payment order to when it gets credited to the supplier’s bank.
While there’s no built-in payment protection here, banks generally conduct some form of identity verification on businesses and account holders, making this considered a safer payment method compared to many others.
You can mitigate risks by paying your supplier in installments, for instance, paying a 30% deposit when placing an order and the remaining 70% after quality inspection and shipment.
2. Third-Party Escrow
In this payment method, a trusted third party holds the funds that the buyer agrees to pay the supplier and transfers them to the seller only when certain predetermined criteria are met (such as the buyer receiving the goods on time, as described). Alibaba, a Chinese business-to-business platform, provides a service called “Trade Assurance” for buyers and sellers, similar to an escrow service. Alibaba promises refunds in cases like:
A. Delays in your shipment beyond the promised date.
B. Your products not meeting the specified quality standards.
However, this payment method is not widely popular among Chinese suppliers.
Escrow protects both buyers and sellers. Buyers are safeguarded against sellers disappearing after receiving payment without delivering the goods, while sellers are assured of payment if the goods are delivered as promised.
For buyers, the limitations of Alibaba’s Trade Assurance are that you’ll be restricted to suppliers on Alibaba. Even within that platform, you’ll need to choose from a smaller pool, as not all Alibaba suppliers sign up for this service because it charges them a 5% fee (which many might pass on to the buyer). Additionally, you’ll need to make full payments upfront in the initial stages, tying up your funds for a period.
3. Letter of Credit
A letter of credit is a payment mechanism where a bank guarantees payment to the seller on behalf of the buyer. Banks typically issue these letters of credit to clients who provide some collateral, and they charge a certain percentage of the letter of credit value as a fee. This method is best suited for large companies, as the high fees can eat into the profits of smaller orders.
There are various types of letters of credit, and they can be quite complex, so we won’t delve into them here. Suffice it to say that while this is a reliable payment method, it’s not an ideal one due to its relative expense and the extensive paperwork involved.
4. PayPal
PayPal is suitable for small orders or initial samples. However, be cautious of the high fees and complex payment protection policies. Carefully read the fine print before making significant payments through PayPal.
5. Western Union
While Western Union is convenient for individuals looking to make urgent transfers worldwide, most serious buyers tend to avoid this payment method. This is because it doesn’t offer real payment protection, and the fees can be quite high.
When you send money through Western Union, you receive a 10-digit Money Transfer Control Number (MTCN) and pass it on to the recipient. Anyone with that number and proper identification can collect the funds at a Western Union branch. However, if that person disappears with your money, neither you nor Western Union can do much to help.
It’s also rare for legitimate suppliers to request payment through Western Union. So, if you hear of any potential supplier insisting on this method, exercise caution.
6. Procurement Agents
If you’re working with procurement agents like Sourcing Allies for your China sourcing projects, you can also make payments to your suppliers through the agent.
When you have a trusted procurement agent, this is a reliable method of paying suppliers. However, ensure you check whether the procurement company charges additional service fees. When you make payments through us, the risk of fraud is low because we usually collaborate with established Chinese companies with whom we’ve built a solid relationship. We also conduct inspections by visiting the supplier’s premises before making any payments, and we don’t make full payments until the products are approved and ready for shipment.
When choosing a payment method, consider the size of your order, the reputation of your supplier, and the relationship you have with them. It’s essential to strike a balance between convenience and security when paying your Chinese suppliers.