How to Pay Manufacturers in China - Guest Post by Chad Rubin
China is the world's largest manufacturer, with a yearly output of more than $12 trillion in export products. For e-commerce stores, Chinese manufacturers represent a wide variety of possibilities, with benefits including lowered costs, faster production time, and massive factories capable of handling nearly anything you need including product duplication, reverse engineering, unique products and more.
However, once you've sourced a Chinese supplier or manufacturer, you need to figure out how to pay them. While domestic payments are typically handled with PayPal or credit card in the USA, these methods aren’t widely accepted in China. So, how can you safely pay a supplier on the other side of the world?
How to Pay Manufacturers in China
There are several payment methods you can use to pay manufacturers and suppliers in China, but each has pros and cons.
Alipay, the secure payment method developed by Alibaba, is one of the most popular ways to pay suppliers and manufacturers in China. Here, the manufacturer simply lists your order on Alipay, you order it, and the purchase is processed through Alipay's systems. For an additional 5% of the order, you get buyer protection, quality disputes, and escrow to ensure that you get your order. However, you do pay high fees, can only use it through Alipay, and must pay the full amount upfront.
Bank Transfer or Telegraphic Transfer
Most bank transfers cost anywhere from $30-$50 per payment and no more, making them ideal for large orders. While many business owners shy away from bank transfers due to the difficulty of getting money back, this payment method makes sense with trusted suppliers because you can cut costs and ensure payment within 5-7 days depending on the bank. You also must be careful to ensure that every detail on the bank transfer is correct.
You can reduce risks by setting payment terms, such as 30% upfront and 70% of on satisfactory delivery of goods, and ensuring that you have a legally verifiable purchase agreement in advance.
This is the most popular payment method for suppliers in China.
Western Union is a surprisingly popular payment method among Chinese manufacturers and suppliers, largely because it offers fast and convenient payment, flat rate fees, and little traceability. However, you should ensure that the company is trustworthy, have payment terms in place to control quality and deliverability, and put a purchase order agreement in place before wiring money.
Western Union is often the preferred method of payment for sample orders.
Letter of Credit
A Letter of Credit payment is one of the most secure payment options you can choose and a good option for large orders if you’re working with a new supplier. In most cases, if you are placing an order over $50,000, a letter of credit should be your only choice. Here, your bank makes a payment agreement with the supplier or manufacturers bank and when you receive your goods, the bank pays their bank. Everything is handled by the finance institution, and your purchase is fully secured and insured.
However, Letter of Credit payments cost an average of 1.5-3.5% on top of standard fees, which are typically $50-$75. This can be very expensive when handling orders that cost in excess of thousands of dollars. Letter of Credit payments allow you to request financing from the bank.
Because Letter of Credit payments are expensive and time consuming in that they require a great deal of paperwork, they are not advised for small orders.
What Isn't Widely Accepted
Many common domestic payment options are not accepted in China. Here’s a quick explanation why.
While credit and debit cards are the most commonly accepted payment option in the USA, they are rarely accepted internationally. Some Chinese suppliers and manufacturers accept international credit cards but many do not simply because they pose too large of a risk at high volume sales. For example, a credit card might take weeks to deny a payment due to insufficient funds, by which time the supplier will have already begun the manufacturing process.
Some suppliers and manufacturers accept PayPal, especially in tech fields. However, adoption is low and many do not accept it. PayPal fees are typically 3.5% for sellers, PayPal can seize and hold large transactions for review, and PayPal reports all transactions to government bodies, leading many Chinese manufacturers to be wary of it.
If you sourced a Chinese manufacturer through a sourcing company, you can likely arrange payment through them. For example, many Chinese companies prefer to be paid in cash, and a sourcing company may be able to handle Cash on Delivery or a local payment via bank transfer once your goods are manufactured and produced. However, there will be a fee for this service, and you should ensure that you trust your sourcing company enough to hand over the full amount of the order to them.
While you are likely most concerned about choosing the right payment method, you should also consider additional items such as tax. If you purchase something in China you will be responsible for transfer fees, VAT (Value Added Tax), and import taxes. These will apply to every invoice but may not be reflected on the invoice. Double check to make sure that you are paying the correct amount.
Sourcing products from China means accepting risks. You’re buying from a manufacturer on the other side of the world, it will likely be months before you see product, you will have to pay at least part of the fee upfront and pay import costs. It is important that you minimize risks without accruing additional costs to ensure that your investment is safe.
Research the Supplier
If you cannot find information on a supplier, you might not want to purchase from them. Try to check other reviews, get references from other suppliers, check their product catalog, and if possible, see samples before committing to an order.
Negotiate Payment Terms
Paying 30% upfront and 70% on delivery is a common payment arrangement that will protect you in case the goods aren't as ordered. It will also minimize risks in case the supplier does not deliver or does not deliver on time.
Find a Local Broker
A local broker or sourcing company can help you to negotiate with quality companies without the language barrier or other issues you might find by looking for companies on your own. You can look for trustworthy manufacturers first, but a local sourcing company will make the whole process easier if you can afford the additional expense.
Check Sourcing Reports
Global Sources maintains an in-depth list of China Sourcing Reports which you can use to find qualified suppliers and manufacturers with verified contact information. Keep in mind that 'verified' by Global Sources simply means that they exist, not that they have a good reputation.
If something seems off about an order, stop, do more research, and proceed with caution if at all.
Sourcing products directly from Chinese manufacturers and suppliers can save you considerably over sourcing Chinese-made products from Western suppliers. However, it is important that you do your research, choose the right payment method to mitigate risks, and move into any new supplier relationship with caution.
Crucial Vacuum Founder Chad Rubin grew his e-commerce business to an 8-figure business in 7 years. He is a Top 250 Amazon Seller, and co-founded Skubana as an all-in-one ERP system and operations platform designed for high volume sellers to run and automate their business. It integrates with most e-commerce marketplaces, 3PLs, and warehouses, provides profitability and multi-channel inventory management, and compiles all of your marketplaces on a single convenient dashboard. Learn more at firstname.lastname@example.org or sign up for a 14-day trial.