Negotiating Payment Terms: Medium Sized Orders
The following blog post is to give some tips if you find yourself negotiating reasonable payment terms for the first time with a supplier.
The target audience are buyers who are purchasing between 10K USD and 100K per given order.
If you are larger, you may wish to explore more sophisticated payment mechanisms such as letter of credit.
A smaller operation may not have much leverage with the seller and may end up receiving less acceptable payment terms. If that is the case, it’s essential that you conduct Due Diligence and other measure to protect yourself. You’ll find plenty about Due Diligence on our website and blog.
New at Negotiating Reasonable Payment Terms
So for the purpose of this blog post, let’s say you are buying from China for the first time and in the middle of negotiating the price/terms with a new Supplier.
A supplier may ask for 100% payment in advance, so do not let this come as a surprise. Realize this is negotiable, just as you wouldn’t necessarily accept the first offer of price without a negotiation. Terms such as “30-40-30 terms” are an acceptable middle ground on reasonable payment terms, fair to both parties.
Under 30-40-30 terms, the initial 30% of PO value is a deposit. This allows the supplier to buy materials and lock in the price (especially important if you have a long lead time or deal in materials which face great price fluctuations, or example metals.) The second payment, of 40%, occurs at shipping upon confirmation of quality. Then they pay the final 30% upon receipt and inspection at the final destination. Let’s look at this 30-40-30 from both the buyer’s and seller’s perspectives to find why it was an acceptable middle ground.
The seller is worries that the buyer will default on payment, so getting 70% (40+30) before the goods leave port limits their exposure. As the average factory in China makes between 10 and 30% mark up, the 70% covers at least the majority of his internal costs, so even if the buyer defaults it won’t put him out of business.
The buyer’s biggest concern is that the goods will have quality issues or not arrive at all. By holding out on the final 30% until delivery, the buyer has leverage if quality problems require re-work or replacement parts. It is also important to remember that the 40% is not paid until they inspect the goods in China. So quality confirmation must be a key part of the payment process if you want to be safe.
Need Help Negotiating Reasonable Payment Terms
If you need additional help with the reasonable payment terms and other contractual issues, consider the following services:
Business Advisory Services: Help structuring the relationship and negotiations with your supplier.
Bilingual contract templates & customization: Help putting an appropriate bilingual and legally binding contract in place in China.
About the author: Mike Bellamy ABL advisory board member
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