In supplier disputes, leverage follows money. Whoever holds the unpaid balance when a problem surfaces wins most negotiations without ever seeing a courtroom. That is why payment terms deserve more drafting attention than almost any other clause in a China purchase agreement.
T/T: the default, and how to structure it
Telegraphic transfer (bank wire) covers the great majority of SME orders from China. The standard split is 30 percent deposit on order, 70 percent balance before shipment — but the words after "before shipment" carry all the risk:
- Worst: balance before shipment, no inspection condition. You pay against the supplier's word.
- Better: balance after a passed third-party pre-shipment inspection. Now your AQL clause has an enforcement mechanism.
- Best for buyers: balance against copy of the bill of lading after passed inspection. The goods are on the water; the supplier still controls the original B/L until paid, so both sides hold security.
Three further T/T rules. First, the beneficiary account name must exactly match the supplier's registered Chinese company name — paying a Hong Kong affiliate or a personal account destroys both your fraud protection and, often, your ability to sue the real counterparty. Second, treat any mid-transaction "we changed banks" email as fraud until verified by phone on a known number; payment-diversion fraud through compromised email is the most common loss we see. Third, resist 50 percent or higher deposits except for genuinely custom tooling, and document tooling ownership separately.
Letters of credit: expensive, but they change behaviour
An irrevocable letter of credit puts a bank between you and the supplier: the supplier is paid when it presents documents strictly conforming to the credit — typically the B/L, packing list, certificate of origin and, crucially, a third-party inspection certificate you name in the L/C. Realities to price in:
- Bank charges typically run 0.5 to 1.5 percent plus fees, and Chinese suppliers often add margin for the working-capital cost.
- Below roughly USD 50,000 to 100,000 per order, the cost and administrative friction rarely pay off; above that, an L/C is often the cheapest dispute you never have.
- The discipline cuts both ways: a one-character discrepancy in documents lets the bank refuse payment, so suppliers take L/C orders seriously — and you must draft the required documents precisely.
Remember the limit: an L/C polices documents, not goods. Without an inspection certificate as a required document, a container of bricks with conforming paperwork gets paid.
Escrow and platform protection
For smaller orders, platform escrow such as Alibaba's Trade Assurance holds payment until you confirm receipt or a dispute is resolved. It is genuinely useful below the L/C threshold, with caveats: protection follows the platform's dispute rules rather than your contract, claim windows are short (often 30 days from delivery), and the remedy is a refund, not consequential damages. Keep the transaction on-platform — suppliers who lure you off-platform to "save fees" are removing your protection, sometimes innocently, sometimes not.
Independent escrow agents exist for mid-size transactions but verify the escrow holder as carefully as the supplier; fake escrow is itself a fraud pattern.
Matching structure to situation
- First orders with an unverified supplier: small trial order, escrow or L/C, never a large bare deposit.
- Established relationship, repeat SKUs: 30/70 T/T with balance against passed inspection; push toward partial open-account terms (for example 30 days from B/L) as trust and volumes grow — ideally backed by Sinosure or trade credit insurance on the supplier's side or yours.
- Custom products with expensive tooling: separate tooling agreement stating you own the moulds, with the tooling payment distinct from unit pricing.
The clause that ties it together
Whatever structure you choose, write it into a bilingual purchase agreement with your quality, delivery and dispute clauses — including liquidated damages the unpaid balance can be set off against, and a forum (Chinese courts or CIETAC arbitration) where the award reaches the supplier's assets. Payment terms without a contract are a hope; payment terms inside one are leverage.