Payment Terms When Working with China Suppliers: T/T, L/C & Escrow Explained

Payment Terms When Working with China Suppliers: T/T, L/C & Escrow Explained

One of the most critical aspects of sourcing from China is choosing the right payment terms. The wrong payment structure can expose your business to significant financial risk, while the right one builds trust and protects both parties. This comprehensive guide breaks down every payment method used in China trade.

Why Payment Terms Matter in China Sourcing

Payment terms define the financial relationship between buyer and supplier. They determine:

• Cash flow management — when your money leaves your account relative to receiving goods
• Risk allocation — who bears the financial risk if something goes wrong
• Supplier motivation — how payment timing affects production priority
• Negotiation leverage — your ability to negotiate prices and quality standards

For first-time importers, payment terms are often the most stressful part of the process. You're sending money to a company thousands of miles away, in a different legal jurisdiction, often before seeing the finished product.

T/T (Telegraphic Transfer) — The Most Common Method

Telegraphic Transfer, commonly called T/T or wire transfer, is the most widely used payment method in China trade. It's essentially a bank-to-bank transfer.

How T/T Works

The standard T/T arrangement for China sourcing is 30% deposit before production, 70% balance before shipment. Here's the typical flow:

• Buyer and supplier agree on product specifications and pricing
• Supplier issues a Proforma Invoice (PI)
• Buyer sends 30% deposit via wire transfer
• Supplier begins production
• Supplier sends pre-shipment inspection photos/videos
• Buyer sends remaining 70% balance
• Supplier ships the goods and provides shipping documents

T/T Variations

T/T Tips

• Always use the company bank account, never a personal account
• Verify bank details through a separate communication channel (phone call)
• Keep the deposit as low as possible (20-30%) for first orders
• Never send 100% upfront to a new supplier

Letter of Credit (L/C) — Maximum Security

A Letter of Credit is a bank-guaranteed payment instrument where the buyer's bank promises to pay the supplier once specific conditions are met.

How L/C Works

• Buyer applies for an L/C at their bank (issuing bank)
• The L/C is sent to the supplier's bank (advising bank)
• Supplier ships goods and submits required documents
• Banks verify documents match L/C terms
• Payment is released to the supplier

Types of L/C

• Irrevocable L/C — Cannot be changed without all parties' consent (standard)
• Confirmed L/C — An additional bank guarantees payment (extra security)
• Sight L/C — Payment upon presentation of documents
• Usance L/C — Payment deferred (30, 60, 90 days after sight)

When to Use L/C

• Orders above $50,000
• First-time orders with unverified suppliers
• High-risk product categories
• When you need documentary proof of quality/quantity

L/C Costs

Expect to pay 1-3% of the order value in bank fees. This includes:

• Application fee
• Amendment fees (if terms change)
• Document examination fees
• SWIFT charges

PayPal & Online Payment Platforms

PayPal and similar platforms are common for small orders and samples.

Pros

• Buyer protection program
• Fast and convenient
• Transaction records for disputes

Cons

• High fees (3-5%)
• Suppliers may add surcharge to cover fees
• Not practical for orders above $5,000-10,000
• PayPal may freeze accounts with large transactions

Trade Assurance & Escrow Services

Platforms like Alibaba offer Trade Assurance, which acts as an escrow service.

How Trade Assurance Works

• Buyer places order through the platform
• Payment is held in escrow
• Supplier ships goods
• Buyer confirms receipt and quality
• Payment is released to supplier

Limitations

• Dispute resolution can be slow
• Coverage limits may not match order value
• Only works on the specific platform
• Some suppliers inflate prices to cover platform fees

Western Union — Avoid for Business

While some suppliers request Western Union payments, Trade Entrust strongly advises against it for business transactions:

• No buyer protection
• Difficult to trace
• Often associated with scams
• No business documentation

How to Choose the Right Payment Terms

Decision Framework

Negotiation Tips

• Start conservative — Use safer terms for first orders and relax as trust builds
• Link payment to inspection — Make the balance payment contingent on passing third-party inspection
• Get everything in writing — Payment terms should be clearly stated in the purchase order
• Use milestones — For large orders, consider splitting into production milestones
• Build relationships — The best payment terms come from long-term partnerships

How Trade Entrust Helps

As your sourcing partner, Trade Entrust manages payment logistics:

• We verify supplier bank accounts and business licenses
• We structure payment terms that protect your interests
• We hold supplier payments until quality inspection passes
• We provide transparent payment tracking
• We handle currency conversion and international transfers

Key Takeaways

• T/T 30/70 is the standard for most China sourcing transactions
• L/C provides maximum security for large orders
• Never send 100% upfront to a new supplier
• Always verify bank details through multiple channels
• Link payments to quality milestones whenever possible

Get a free consultation on payment terms for your next order →