Bank transfer most favored payment method among China export

An Expert's View about Business Environment in China

Posted on: 29 Jul 2013

Practically all respondents accept TT, whereas only 66 percent of participants said their preferred mode of payment is letter of credit.

The last has been declining in popularity over the past few years as concerns over L/C risks continue to grow.

For one, discrepancies are practically unavoidable. Disparities necessitate a waiver from the buyer who might take this opportunity to delay payment if he is low on cash.

Further, credit restraints are making it harder for some issuing banks, usually in Europe and the US, to confirm or even endorse L/Cs.The last two make it difficult for suppliers to use an L/C as collateral in securing bank loans, reducing its appeal among SMEs further.

Considering these factors, the 66 percent favorable response rate that L/C received is noteworthy. "This is more than I thought and it is good news for buyers who want a degree of safety that bank transfers do not allow," said Renaud Anjoran, who writes advice for importers on the Quality Inspection blog

As for TT, the payment method is extremely popular among SMEs with operations largely dependent on a steady inflow of funds. Among respondents that said TT accounted for more than 90 percent of export payments, 61 percent post between $1 million and $5 million in overseas revenue annually. One-fourth earn less than $1 million. Only 6 percent can be considered large, with export sales of $10 million to $20 million.

TT offers suppliers several advantages, including very low bank fees. TT is also the fastest mode of payment with money reaching the supplier’s bank account in just a few days. Some unscrupulous exporters use TT to evade taxes by asking for the payment to be wired to a private bank account, something that is impossible with an L/C.

Some exporters allow a combination of payment modes. In such cases, the deposit can be made through TT and the rest is paid in another way.

With regard to D/P, D/A and open account, these are risky for suppliers as these modes of payment require confidence in a buyer’s sustained flow of business.

As explained by Anjoran, a small importer might have to shop around a long time before finding an exporter willing to work on such terms. A large and established importer can impose deals on his terms more easily because he is “attractive” to many suppliers. Similarly, large exporters are more familiar with overseas markets and with their target customers, and can take a calculated risk by accepting risky payment terms.

Of the 69 respondents that accept TT, more than half said over 80 percent of export transactions are paid via wire transfer. For 22 percent of companies, 61 to 80 percent of revenue comes from TT.

The reverse applies to the other payment types.

Close to 40 percent of surveyed suppliers in the L/C subgroup said L/C transactions represent less than 10 percent of revenue. An almost similar number of respondents said 11 to 30 percent of earnings come from L/Cs.

When accepting L/C, 38 percent of these companies said they ask for at least $50,000 worth of goods. Eight percent set the minimum purchase value at $30,000.

Such steep requirements are becoming common as suppliers grow even more cost and efficiency conscious. Many exporters believe that large orders, particularly those that can be manufactured in batches, can bring down expenditure by as much as 30 percent.

Even so, there are still exporters offering more reasonable ordering terms. L/Cs are accepted by 30 percent of makers for purchases worth at least $10,000.

Still on the supplementary role of non-TT transactions, this is particularly evident in the D/A and D/P subgroup. Nearly two-thirds of suppliers under this classification look to these payment methods to generate less than 10 percent of export sales.

Nevertheless, there is hope for buyers if they are good at motivating potential suppliers to accept their orders even though payment terms are not favorable. Anjoran expects the percentage of suppliers accepting these risky terms to go up.

He added, "Another option for buyers who need to keep leverage in their hands is to pay 20 percent or 30 percent before production starts, 50 percent after a preshipment inspection and the rest after delivery in their country. I also expect this to become more common."

Down payment a must

A 30 percent down payment remains the norm across most China export industries, and the deposit is often a must when the goods are highly customized and made to order.

Nevertheless, buyers will still be able to find suppliers offering better deals.

When the goods are standard and made to stock, exporters can accept an advance payment of just 10 or 20 percent, or even forgo pre-production deposit. Some suppliers forgo completely the down payment for select clients that have, in one way or another, sourcing "credibility."

An example of the last is the buyers’ country or region of origin. Customers in the US and the EU, especially those with large and midsize companies, stand a better chance of closing manufacturing deals sans a down payment than those in new markets. This is because China suppliers still aim to spur orders from the US and the EU even as growth opportunities in emerging destinations continue to expand.

The trust issue comes into play here. Long-term European or US customers are seen as more stable and trustworthy than new clients from say the Middle East or South America.

Order frequency matters as well.

In our survey, customers placing their fourth order are the second most likely to avail of zero down payment terms.

Bottom line, these results indicate that it is important for buyers to know that they can press their suppliers for more favorable payment terms, be it a lower pre-production deposit or 20 to 30 percent payment after delivery. "If the supplier has cash on hand and considers you as a good customer, he will say yes if you insist," said Anjoran.

Amid the possibilities of better deals, buyers should also be aware that some China suppliers, faced with various manufacturing and export risks, are raising ordering requirements to protect against possible losses.

A few survey participants, for example, ask for as much as 80 percent down payment.

Some even require the full amount before they start production, especially if the order value is rather small or if the customer has not yet established a long-term partnership with the exporter.

More than one-third of survey respondents said they tend to ask for full payment for one-time orders worth less than $5,000.

Small buyers from both emerging and traditional markets also need to be aware of this policy.

The requirement may seem steep, but suppliers said their customers have been quite considerate. Close to 75 percent of interviewed makers said that at one time or another, clients have paid them in full prior to production.

Buyers need to be aware of the risks of such terms. For one, there will no longer be an incentive for the supplier to deliver quality products on time if full payment is done in advance.

Payment options for first-time buyers

China exporters look at the order value, the buyer's country and the size of operations of first-time customers when proposing payment terms.

A large reputable client from a developed market placing a big order is more likely to get buyer-friendly conditions that require a low down payment and can be settled via an L/C or open account.

A commitment to future orders will also tip the scale for the buyer, as will China sourcing history and the presence of a representative in the country. For exporters, all three are indicative of their potential client’s long-term China plan.

It is worth noting that suppliers gave relatively low importance to the promise of future orders. This option’s response rate is much lower than that of the value of the first order, even though first orders are often a trial and not a perfect indicator of the size of purchases to come.

For Anjoran, the reason is simple. "Suppliers have learned to take any promise from their customers with a grain of salt," he said. "The exception would be famous brands such as GE or Ikea. Exporters can assume orders from these brands will be large."

As far as payment currencies go, many China exporters are cautious of the falling dollar and are increasingly favoring the yuan.

Forty-six percent of suppliers prefer to accept the yuan in the next six months to leverage its continuous appreciation against the dollar. The yuan-US dollar exchange rate has been at the highest level since China started exchange rate reform in 2005.

This leaning toward the yuan is in contrast to how exporters have been conducting business previously. As recent as the past half-year, most companies accept both US dollar and yuan payments for orders, with the occasional settlement in euro or Hong Kong dollar thrown into the mix.

Survey sampling

The sample selected for this survey is representative of China's export manufacturing industry in terms of location, industry, company size and nature of production.

The majority of the 70 participants are based in Guangdong, Zhejiang and Fujian provinces, the country’s primary export hubs. The companies are from a range of industries, including electronics, garments and fashion accessories, gifts and premiums, home products, and hardware and DIY. Production is mainly OEM-oriented.

Sixty percent of respondents are midsize, most of which generated between $1 million and $5 million in exports in 2012. One-fourth of the respondents are small, posting no more than $1 million in overseas sales. A few large operations likewise participated. Some of these top-tier companies earned over $50 million last year.

Read the full report on Bank transfer most favored payment method among China export. Global Sources is a leading B2B portal and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines and trade shows.

Posted: 29 July 2013

See more from Business Environment in China

Expert Views    
A breath of fresh iPad Air: 14 fancy, functional cases   By Global Sources
Mustknows about business set-up in China   By Sara Cheng, Consultant
Hot Tips    
Due Diligence Doubts?   By China Trade Commission
How To Get Your Money Back From Clever China Cheaters...   By China Fraud Patrol
Latest News    
The China You'll Never Know...   By China Trade Commission