In this post we will look at the most common payment terms when you source custom parts or molds from Chinese manufacturers, I am also going to explain how you can reduce risks by working with Boyan.
What do payment terms mean in this post?
The payment terms in this post refer to the negotiation of the timing of when to make payments to your supplier during the order completion process, for example, 30% deposit before order production, with the remaining 70% paid before shipment. Please be noted it is different than the payment method (like PayPal, T/T wire transfer or L/C).
The payment terms are the main obstacle to overcome if you are new to sourcing from China.
Needless to say, the payments terms are very important, they decide how much a favorable position you take against the supplier, and what portion of risks you will have in the transaction.
The nature of payment terms concerns is “Trust” for both buyers and sellers.
After all, the purposes of negotiating the payment terms are:
- The buyers get their products made to the specs, and on time;
- The sellers get paid if they accomplish the jobs well.
For any new buyers, sending money to a supplier in another country before the quality of products has been verified is always a bit risky. However, the same concern exists for the Chinese suppliers.
In fact, almost all stories have two sides. In international trading, the scamming does not only exist with suppliers, but also with buyers. If something bad happens, most Chinese suppliers (small and medium-sized) can literally do nothing to recover losses through legal court.
This is why that it is very difficult to get net terms (like net 30, net 60) from Chinese factories. It is not because that the factories do not have the financial ability, but because of TRUST.
In other words, this is the cost of TRUST.
The cost of trust is even higher when it comes to custom parts and molds.
Why? Because the custom parts and molds are uniquely made for you. Unlike the standard items that may have other buyers, if you pull off the plug half way, no one else would ever need them.
The most common payment terms for custom parts and molds in China
For this reason, unless you are world famous buyers like IBM or GE, you will find most Chinese factories are quite stiff on payment terms, they will be:
- For custom parts: 30% (or 50%) down payment, 70% (or 50%) before shipment (after quality inspection)
- For molds and toolings: 50% down payment, 50% after sample approval.
You may get better terms later if you are a repetitive customer, but if you are trying to negotiate the terms at the beginning, you are probably wasting your time.
The obvious risks of this kind of payment terms
As you can see if you have made the full payment before your products leave the factory, you will be in a very poor position if there are disputes later. At the same time, this puts a lot of stress on you when conducting the quality inspection in the factory before shipment, because if you miss out anything, you will have to swallow it later.
The fact is, up till now, many Chinese factories have poor quality awareness. Even worse, some of them will try to hide the quality issues when their customers come to do the quality inspection, I have heard of many of these stories.
What better terms can you get if you are a regular buyer to a Chinese factory?
Your negotiation strength comes from your order volume, the price, your company size, and business reputation. If you are a repetitive buyer to your suppliers, it is possible to get better terms.
For custom made products, pre-payment will be mostly required. The difference is: you can pay the remaining amount while your goods are on the water, that could be 20 or 30 days after the goods leave the port. This is sometimes called as payment against the copy of B/L, meaning you make the payment after they send you the copy of B/L, then they will release the original copy to you.
It does not make much difference for a one time purchase, you still have to pay the full order amount before you receive your products, but if you are buying on a repetitive basis, it allows you to check quality of the earlier batches of products while the next batch of products are in the manufacturing processes or on the water. As a result, you will have much stronger leverage if some issues arise.
Building trust is never easy, that is where Boyan comes into play.
Boyan Manufacturing Solutions is a sourcing company for custom parts and molds.
Paying to Boyan is kind of like an escrow service
It is not that you choose the suppliers to work with and paying them through us. We always prefer to work with factories that are chosen by us. We welcome you to make recommendations, but the suppliers should be vetted and approved by us.
By saying we are like an escrow service, it means that we act as an impartial third party not only for quality control and inspection, but also for dispute settlements.
Compared to usual third-party escrow services, we can make much stronger judgments
First, we get involved in the order production from the beginning, so we know everything about quality requirements, inspection criteria, problem solving history etc. We put forward the quality requirements in front of the factories before production. As a result, if something goes wrong, the factories will take responsibility.
Second, we only work with factories that we feel comfortable with. We know they are honest, easy to work with, and being reasonable if there are disputes.
We are impartial and more in favor to customers in dispute settlements
The main point is: as a sourcing company if some quality issues were found, the factories are going to take the losses, not us. This helps us to take a more unbiased position in dispute settlements.
Our success comes from our customers’ success. It is our responsibility to deliver quality products to our customers.
Make your quality requirements, inspection criteria clear if you want to be better protected
- If you are an engineer yourself, or your company has an engineering team, then there should be no problem working out the engineering specs.
- Your specs do not need to be so detailed to cover everything, there are general industry standards or common sense to follow, we will get that part covered.
- It is always helpful to tell us the application of your product, so we can have a better idea of what we need to pay attention to for proper functioning.
- In case you are a garage inventor who has great ideas but lacks sufficient engineering knowledge, then it becomes a bit more challenging. It is advised that you explain us more details of the application of your product, so we can work out the specs for you. If you have IP concerns and do not wish to release many details, then you are at the risk of receiving parts that may not function ideally. In that case, I am afraid we are not responsible for the issues that have not been specified in advance.
Under what circumstances your loss will not be recovered from us
- Our products meet the drawing specs and common industry standards. Tip: If you are not good at reading drawings, then we can send you samples for testing instead.
- We have delivered the samples and you did not find the issues existed on the samples, we will not be responsible for the same issues existed in mass production. Tip: when we send you the samples it means the ball is in your court, deal with it carefully before passing the ball back to us.
- In the new product development when there are still a lot of uncertainties. Tip: You need to test the prototypes and optimize the design with full attention before entering into mass production.