by Mike Bellamy in 'China Sourcing Information Center'

I have a query regarding payment terms in China. Is it normal to pay 50% with purchase order and the balance prior to dispatch?

ANSWER:

This is very normal for a first order with a new supplier. But everything is a negotiation and there is no fixed payment format that is applicable nationwide or industry wide. Sometimes buyers get better terms (for example, 30 up front and 70 upon delivery) but I suspect the unit price would reflect this.

In other words, if you are paying one supplier a bit more upfront and another supplier less upfront, all other things (quality, lead-time, service…) being equal, you can expect to pay a bit more per unit for better payment terms.

Couple of tips.
1. If you don’t ask for better terms they will not be offered to you. So go ahead and ask for something better, it can’t hurt. If this is your first order, then the supplier may also be concerned about you defaulting on payment, just like you are concerned they will mess up your order. Build trust over time and with each order ask for better and better terms. For example, on this order you may say something like “I’ll accept your 50-50 terms for this initial order, but I plan to pay on time and I plan to order regularly. So on the next order I want 30-70 and the order after that I would like 30-70 net 15.”

2. Far more important than worrying about 50-50 vs. 30-70 on the first order is to make sure you have a plan for linking payment to performance. If you catch quality problems after the final payment has been made, it really doesn’t matter what the payment terms were as it is too late to fix things. It is essential that you or a trusted 3rd party (called an “inspection agent” or “3rd party QC”) visit the production line to inspection the goods BEFORE you make that final payment. If you have not done business with this supplier before, then it is a good idea that you or a trusted 3rd party conduct an audit on the supplier to ensure they can produce what they have promised.

References:
1. Staff from www.CBIconsulting.com.cn (experts in Due Diligence) contributed to this answer.
2. Staff from www.PSSchina.com and www.AsiaQualityFocus.com also supported the author.
3. If you need 3rd party support, you can find reputable companies (including the 3 mentioned above) at http://chinasourcinginfo.org/endorsed-service-provider/

This is a question answered by Mike Bellamy on Ask the Experts Q&A in China Sourcing Information Center.

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. He is also the author of “The Essential Reference Guide to China Sourcing”