Updated by Neil
The Ordering chapter already included most aspects of payments. This chapter gives you detailed explanations on making that payment and the most common options considered while paying international suppliers.
All suppliers generally ask for advance payment to assure you that you won’t back out of your deal later. This is especially the case if you have made a small order of a value of $1000 or less. However, if you have built a strong work relationship with your supplier, he may pardon this payment or be open to other terms of the agreement.
The following are options of advance payment methods for your shipment orders:
PayPal can prove to be a useful method for the payment of smaller capacities like a small order of goods or payment of samples. However, it won’t be wise to use it to pay for a large number of shipments. The majority of Chinese suppliers either refuse PayPal payments or charge an extra 5%. This is to cover the risk lest you decide to cancel the payment once the goods have been shipped to you.
With PayPal charging a 3.5% fee, you will have to pay high fees for large transactions. In addition to which there is the cost of currency conversion. All this could diminish your profit margin exponentially. PayPal also does not provide any exceptionally reliable buyer protection policies for international transactions.
- Credit Card
Paying the advance with an international credit card can prove to be very convenient. However, you may find some difficulties in using them in China. Some other complications you may face are:
- Most suppliers don’t usually accept them in fear that you could cancel the advance payment after you receive the goods.
- Most small factory establishments are not prepared to handle credit card processing.
- Credit card payments can prove to come with expensive charges for both the importer and the supplier.
- You may also be at a disadvantage where the supplier could fold before forwarding you the goods.
- Western Union
Western Union is famous for being a safe and secure method to send funds across the world. It is a fast and cheap payment method with low added fees. It is beneficial for the supplier and, therefore, is very popular amongst them. However, this can be a disadvantage for you since you carry all of the risks.
Western Union does not allow you to send funds to a company only to an individual to send funds to an individual. There is also no chance of you getting your money back (if things should go south) once the payment has gone through. You should only choose this method for transactions up to $10,000, and only if you trust your supplier.
- Alipay Online Escrow Service
Alipay is an online escrow service offered by Alipay, which is much similar to PayPal. When you send payment to Alipay, they assure the supplier that the funds are available. Alipay releases the funds to your supplier when they ship the goods to you.
For companies that trade on Alibaba, it is a smart choice to pay through Alipay itself. It is also feasible for transactions up to about $5,000. Alipay offers a feature called Alibaba Assurance. It is a policy where they assure you a refund if the shipment is delayed beyond a specific date or if the goods up to the quality standards you mentioned. You should always check if your supplier is included in Alibaba Assurance before trying this payment method.
- Other Online Payment Services
There are plenty of other online payment options; for example, Payoneer offers secure international payments.
Advantages of using these payment services:
- It allows payments of any size to be made to the other users.
- These payments are generally free and do not take up much of your time as one transaction only takes a few hours to clear.
- You would not need to endure high foreign exchange costs.
- It is also attractive to your supplier because they would not need to pay a fee to withdraw their money.
- This payment method is acceptable to small factory owners as well.
- You should make sure that the service provider provides a dispute resolution mechanism. This will give you a way to get your money back if your supplier decides not to go through with the deal after you have already paid.
It is a popular method to pay your advance with cash in China, specifically among smaller factories. This can be possible if you have a representative in China. You could pay in cash with the help of these representatives and also enjoy a discount on it. However, there is a risk to it as there is no way of getting your money back if something does not go as planned.
This is the ideal payment method since you get to pay after the goods are produced or after you have already received your goods. This way, you can pressure the supplier to produce the best quality products, or he would not get paid. Then again, not many suppliers agree to this form of payment. There is a way you can prevent any disagreement and still convince the suppliers to agree to a post-production payment. You can do so by applying trade financing where you would pay the down payment, but a third party would provide support by extending a credit line.
- Wire Transfer
A wire transfer, also known as a Telegraphic Transfer or TT, is still the most common way to transfer money for freight shipments. The funds are directly sent from the importer’s bank account to the supplier’s bank account. However, it is a longer process than the other payment methods because it takes up at least two to five business days for clear funds.
It is an expensive method, but online brokers provide lower fees and better exchange rates than your bank. It’s usually used for larger shipments. It is generally split between advance payment and the balance when the goods are ready to be shipped.
- Letter Of Credit/Documentary Collection
These are two very similar methods. They are not often used these days because they are expensive, extremely complicated, arduous, and may prove to be awfully tedious should there be even a tiny error in the paperwork.
You should only consider choosing this option if you are importing a very high-value shipment.
- Open Account Transaction/Consignment
This method requires you to send the payment only after you have received a receipt of delivery. It is one of the most secure options for an importer. Conversely, it is a hazardous option for your supplier. Therefore, you would hardly find any supplier that would agree to this unless you have an excellent relationship with them.
The small or novice importers should use one of the six methods mentioned above to make advance payments for goods.
Every option provided above has its advantages and disadvantages. You should pick the payment most suitable and secure for you and which your supplier will agree to.