Payment Terms and Methods: Mitigating Risks

When structuring international transactions, selecting appropriate payment terms and methods is crucial for balancing efficiency with risk mitigation. Here are key considerations for overseas buyers sourcing from China:

Common Payment Methods & Associated Risks

1. Telegraphic Transfer (T/T)

   • 30% deposit + 70% balance: Reduces upfront commitment but requires trust in supplier delivery compliance
   • 100% advance payment: Eliminates supplier risk but exposes buyers to non-delivery vulnerabilities

2. Letter of Credit (L/C)

   • Provides bank assurance but incurs 1-3% transaction fees
   • Requires precise documentation matching - 73% of discrepancies occur in commercial invoices and packing lists

3. Open Account (O/A)

   • Post-shipment payment improves cash flow but exposes buyers to quality disputes
   • Recommended only after establishing 6+ months of successful transactions

Risk Mitigation Strategies

• Phased Payments
  Structure 30% deposit, 40% after production confirmation, and 30% upon shipment verification. This maintains cash flow control while ensuring production accountability.

• Third-Party Verification
  Implement pre-shipment inspections (PSI) through neutral agencies like SGS or Bureau Veritas, typically costing $200-$500 per inspection. This verifies:

  • Quantity accuracy (maintain ≤2% variance)
  • Quality compliance (meeting pre-agreed AQL standards)
  • Packaging integrity

• Currency Management
  For transactions under $50,000, consider USD settlements to avoid exchange fluctuations. Larger orders may benefit from forward contracts - locking rates for 3-6 months typically costs 0.5-1.5% of transaction value.

Contractual Safeguards

1. Specify Incoterms 2020 obligations (e.g., FOB vs EXW differences in loading responsibilities)
2. Include liquidated damages clauses at 0.5-1% of contract value per delivery delay week
3. Require performance bonds (5-10% of order value) for orders exceeding $100,000

Dispute Resolution Protocol

• Maintain detailed records of all communications (emails, chat logs, call summaries)
• Escalate issues through formal channels within 72 hours of detection
• Utilize CIETAC arbitration for China-related disputes, with average case resolution time of 6-8 months

Implementing tiered payment structures with verification checkpoints significantly reduces financial exposure. For new suppliers, start with smaller trial orders using L/C terms before transitioning to more flexible arrangements. Regular supplier evaluations (quarterly for first-year partnerships) help build trusted relationships while maintaining quality control.