When you are into the import and export business, a common issue that lingers between you and your overseas supplier is the payment terms.
One needs to be more cautious with payment terms when dealing with Chinese suppliers.
In this article, we will be discussing about the 9 Different Ways to Pay Your Suppliers in China.
What are common modes of International money transfer are you aware of? Mostly people will answer to that by saying “Letters of credit” or “Wire transfer”. But there are more options. One needs to understand all to choose the best option while making payments. You also need to understand whether methods differ from Payment with PayPal and credit cards.
Knowing the methods are not good enough. You will need to have clarity on the risk involved in each transaction or the cost that you need to bear. That will also help you decide on the payment mode you prefer.
As we discuss about the 9 different processes of supplier payment, we will also understand which suppliers are ready to accept those payment terms.
How to Pay Your Suppliers in China
TransferWise is an overseas money transaction option for businessmen who need to pay their suppliers in china frequently.
Why did we list this is the top? The complexity of the entire process is way less than that of the other payment modes we have. The process seems pretty simple-
- Sign up with TransferWise website and create a payment account.
- Make your supplier payment in the currency local to you. There is no headache of foreign exchange conversion on your part.
- Put the bank details of your supplier in the system.
That’s it. Your supplier will receive the amount in their bank account in the form of Chinese Yuan or US dollars. In case you pay a supplier in Hong Kong, the money can be converted to Hong Kong Dollars as well.
The best part here is that the supplier has no obligation of signing up with the website. The process for your supplier will go as simple as getting paid with cash in their bank accounts.
One can access TransferWise from any corner of the world since it has worldwide acceptance.
If you still have concerns regarding the transaction, both parties can go ahead and manage their risk factors by combining payment through TransferWise with deposits, local agency support or escrow.
In the whole process of sending US$ to the Chinese supplier post signing up with TransferWise, you will be subjected to a small amount of transaction fee from the websites end. The fees amount is reasonable as compared to the amount you wish to transact.
You don’t have to face any kind of hidden fees in the form of currency exchange rate. Deals here are struck considering the rate at the mid-market i.e. the one available in Google.
Truly, these features make TransferWise unique.
Exclusive feature of this transfer website is that, you get to create an account called “Borderless multi-currency account” that enables you to store your money in the form of multiple currencies.
If used properly, this transaction method will work out to be cheaper than the rest by 6 times. Even for smallest money transfers, this is beneficial.
2. Telegraphic Transfer / TT / International Wire Transfer
This probably is the most preferred and common form of transaction option that is used worldwide by the suppliers to accept for payment.
However, both the parties face some risk in this mode. To reduce their risk, the supplier using this transaction might ask deposit amount from the merchants and increase their risk factor. In general, the deposits are higher for goods that are customized and difficult to sell.
Ensure you have a strong bonding with your supplier if you are using this method for payment purpose.
This is transaction process, like cash handling, requires you to bear the foreign currency transaction cost or fees on exchange rate. This extra chargeis usually steep and include-
- Fixed charges for SWIFT transactions from the banks that act as intermediary.
- Agent’s handling fees
- Lower rate of exchange as compared to the general online converter of currency.
Clearly, even it is a common form of payment, wire transfer is not the preferable one. It will cost you way more than you think.
Escrow is a mode of payment that protects the interests of both the parties.
Here, even if you have paid the amount before the money is dispatched to the recipient, a third party reserves your fund securely. The money reaches your suppliers only when you receive the goods promised.
This method is accepted by the Chinese. But, if we consider the worldwide scenario, the acceptance is low in the international market for transactions.
Common example of Escrow being used in import and export is the payment terms offered in Alibaba through Alipay Escrow.
Why is this a good option for both?
- Escrow reduces the risk factor from the waiting phase between placement of order and receipt of the goods.
- Interests of both parties are cared for by a tertiary middle agent.
However, the team meant of dispute handling is not very favorable if you face any issue here with the transaction.
The transactions happening here are not devoid of fees. They charge about 5% of the amount you transfer, initially from the supplier but eventually from you.
If you consider it thoroughly, you might compare it with PayPal. Definitely it will not be very promising for valuable transactions. You might want to have convenient smaller transaction using this method. You will save a lot of your money from fees and getting blocked midway if you avoid bigger transactions.
4. Letters of Credit
This is a form of payment that is widely accepted by all big traders of the world. As a matter of fact, not only do they appreciate a letter of credit, some of the suppliers insist on its use too.
But when it comes to Chinese suppliers, small or medium-sized traders refrain from using these. The reason being the complexity of the process and barrier they face with the language.
Since LCs are capable of reducing the risk factor for the suppliers from non-payment by the traders, they tend to enjoy it more. But the comfort is not for the supplier alone. The buyer can also enjoy the security of supplier’s confirmation to your terms no matter what they are.
Can you imagine, with LCs in hand, the international market has observed popular one shot transactions of more than £50,000?
If we flip the coin and try to observe the nitty gritty related to LC, you will observe the below tough side-
- A high transaction fee is involved with every transaction
- Presence of complex paperwork
- The transactions require expert handling, so if you are first timer, hire a professional
Clearly, giving your suppliers a letter of Credit is an expensive payment option. But if you still want to use them, we recommend their use when the transaction amount is huge. Another situation when you will be forced to opt for this is when you supplier mandates this as payment term.
5. Agencies for sourcing
We already know that Escrow is not appreciated Internationally for supplier payments. But a supplier might accept these terms if you try to route the payment through a local intermediary Chinese agent. This is the reason, the importers with inclination towards Escrow, prefer to work with sourcing agents who are local.
If you have a clear communication with your agent, the risk is definitely minimized in the transaction. The intermediary agent will now have the power of holding your Escrow money until proper goods are received. In fact, they get to reject goods that are not satisfactory.
Now, since you have an intermediary involved, your expenses are likely to shoot up. As you already know Escrow payments are subject to 5% fees. When there is a local sourcing agent involved, you will be required to pay more than that amount.The bigger the amount is the higher will be your fees.
We suggest you use this payment procedure when you want a risk free transaction of a small amount. This will help you to avoid unnecessary expenses.
This is an internationally accepted mode of payment. However, the acceptance rate in China is slow, but its growing slowly. In the Chinese market, PayPal has gained its popularity when the amount is low, and the transactions take place for sales of electronic goods.
But why isn’t this method that popular among suppliers universally? The reason are the instances when suppliers observed recall of funds unexpectedly.
PayPal is more focused towards the protection of the buyer, but still the risk factor is not eliminated completely. If you have any international transaction involved in it, beware. The policies for protection are quite complex.
In case of any disputes with PayPal transaction, the claims take time to resolve and there is always an uncertainty of you winning the claim.
When you use this payment mode, you face 2 different fees-
- Service fees charges in percentage
- The rate of exchange for currency conversion
Hence, PayPal has worked out to be convenient when the amount is less. Otherwise you end up paying huge fees for bug transaction amounts. If you are into serious import business, PayPal is not recommended for you.
7. Western Union Money Transfer
Again, a payment mode that is preferred in import business when the transaction amount is low. But this is highly preferred by the suppliers because the transactions are–
- Cheap for suppliers
However, WU has some serious risks involved like lack of protection once the money is processed. One should only consider WU as their mode of payment when the supplier they choose is trustable enough and known.
Even though the published Rate of transaction fees are less, somehow you end up spending more on all your good. Do you know why? Wester Union imposes highly marked-up rate of exchange on each transaction. The rate is higher than the published one when you are dealing with Chinese Yuan. The rates vary drastically with the online google currency rates.
Strangely, this mark-up is never visible on the calculator they provide online. In fact, one needs to sign-up with Western Union to get an idea of their online rate offer.
You can choose WU for your transactions if the amount is not large, but you will always face a costly and risky transaction.
8. International debit and credit cards
With advancement of time, certain suppliers dealing with technology have started accepting credit or debit card payments. If you are buyer, you face lower risk as compared to that of the supplier. If you are a supplier, you need to be aware of the buyers who are fraudulent and can easily lead you into extreme losses.
Apart from the above, the transaction fees are steep as well. They suppliers charge you these fees on transaction at their free will.
Thus, cards are not that popular for business amongst the suppliers from China. But even if the suppliers agree to it, the buyers find it cost-prohibitive. In short, this payment term doesn’t favor either parties.
9. Cash Transaction
Like any other supplier, your suppliers from China will love the idea of getting paid in cash. You might even secure some great discount when you pay them in cash. However, from a buyer’s perspective, you get exposed to risk as you do cash transactions. Your transactions are not protected this way in case your suppliers provide you with goods that are not satisfactory.
The only expense in this case is the cost of converting currency. Some foreign exchange companies might charge you exceptionally high on the conversion rates along with the published fees.
But still in China, cash is extremely popular and preferred by the suppliers. So, if you are engaging in such transactions, we recommend you to be aware of the people you deal with, their fraudulent nature and the chance of hidden fees over the rate of exchange.
Read More :
- How to start Import / Export Business?
- Find The Right Chinese Supplier and Let Your Buisness Boom
- Tips for Successful Negotiation with the Chinese Supplier
- High Demand Goods Importing and Exporting from China
From the above discussion, it is quite clear that TransferWise is the best solution for international payments. It considers the interest of both the supplier and the buyer to ensure a risk-free, low cost payment mode.
Let us know in the comments section if we have not shared the possible way How to Pay your suppliers in China.