Payment terms are risk allocation in disguise: every dollar wired before the goods are verified is a dollar resting on the supplier's discretion. This article maps the common payment structures used with Chinese manufacturers — T/T deposits and balances, letters of credit, and the QC-gated hybrids between them — and shows how to sequence payments against verifiable milestones. It is for founders and finance teams about to send a factory its first deposit.
Why factories ask for money before you have anything
The deposit is not arbitrary. A factory's cash cycle runs in reverse to yours: it buys materials and commits production capacity weeks before any goods exist, and most factories cannot finance that gap from their own balance sheet. The industry's default structure is a T/T wire split into a deposit — commonly around 30% — paid at order confirmation, with the balance due before shipment. The deposit funds materials; the balance demand exists because the factory wants its cash before the goods leave its control.
Understanding the logic matters because it tells you where the negotiable room actually is. The factory genuinely needs material funding up front; it does not genuinely need full settlement before the goods are verifiably correct. Everything sensible in payment negotiation follows from that distinction — you concede the deposit, and you structure everything after it around proof.
The risk ladder
Payment structures form a ladder from "all trust, all speed" to "all proof, all friction". None of the rungs is universally correct; the right rung depends on order size, relationship age and how verifiable the factory is:
| Structure | When your money moves | What protects you | Cost and friction |
|---|---|---|---|
| T/T full advance | 100% before production | Nothing but trust | Lowest fees, highest exposure — avoidable with any new partner |
| T/T deposit + balance (industry default) | ~30% at confirmation, balance before shipment | The factory's need for repeat business; your leverage over the balance | Low cost, fast; risk concentrated at the balance point |
| T/T balance after inspection | ~30% at confirmation, balance after pre-shipment inspection passes | QC evidence gates the final payment | Low cost; needs an inspection you control |
| Documentary collection (D/P) | Payment against shipping documents | Goods documents released only on payment | Bank involvement; no quality check; banks pass papers, not guarantees |
| Letter of credit, at sight | Bank pays against compliant documents | Documentary discipline; bank commitment | Materially higher fees, strict compliance, paperwork burden |
| Platform escrow / trade assurance style | Funds held until shipment milestones | Third-party hold on funds | Moderate; coverage limited to what the platform verifies |
Read the ladder honestly: T/T with an inspection-gated balance delivers most of the protection of a letter of credit at a fraction of its cost and friction, which is why it has become the working standard for small and mid-sized orders. Letters of credit earn their complexity on large first orders with new partners or in markets where contract enforcement is weak.
Letters of credit: what they do and do not protect
A letter of credit substitutes a bank's payment commitment for the buyer's, triggered by documents rather than by goods. Present documents that comply exactly with the credit's terms — bill of lading, invoice, packing list, certificates as named — and the bank pays; present documents with a discrepancy, and payment stalls until the discrepancy is resolved. The protection is real but narrow: an LC verifies paperwork, not quality. A container of defective goods with flawless documents gets paid; a perfect shipment with a misspelled consignee does not.
That narrowness has two operational consequences. First, the documentary burden lands on your side of the table — every certificate and draft document needs checking before presentation, because banks enforce literal compliance without judgment. Second, LC mechanics carry real costs: issuance and advising fees on both sides, discrepancy fees when amendments happen, and the working capital tied up while documents travel. Use the instrument where its protection justifies that weight — large orders, new counterparties, contractual relationships you cannot yet trust to incentives alone — and do not mistake it for a quality control.
Gate the balance to verification
The highest-leverage change most buyers can make costs nothing: move the balance payment from "before shipment, on request" to "after pre-shipment inspection passes". The sequence is simple — production completes, your inspector walks the line against an AQL plan and a golden sample, you receive the report and photos, and the balance wires once — or shortly after — the report clears. If defects surface, the factory fixes them while your money is still on your side of the table, which is precisely the incentive alignment the default structure lacks.
The same gating logic extends through production: an in-process (DUPRO) check around the point where defects become systemic — after first articles, before full run — tells you whether the deposit you already paid is turning into goods you want, while there is still time to correct cheaply. Payment rhythm and inspection rhythm should be one design, not two departments. The inspection types and where each fits are covered in the inspection guide.
Negotiating rhythm without poisoning the relationship
Suppliers read payment terms as a statement about you. A buyer demanding LC on a USD 3,000 trial order signals inexperience and gets priced accordingly; a buyer offering full advance on a fifth reorder signals carelessness and invites complacency. Let the terms track the relationship:
- First order, unverified factory: small order size is your real protection — keep total exposure to what you can lose, pair a standard deposit with an inspection-gated balance, and verify the counterparty before wiring anything.
- Second and third orders: hold the structure, shorten the loop — faster balance release after clean inspections is a concession that costs you nothing and reads as reward.
- Established partner, clean history: relax toward the factory's preferred terms on routine reorders; bank their goodwill as price and priority rather than as risk.
- Large or custom order from an old partner: re-tighten deliberately — milestones against tooling, DUPRO, and inspection-gated balance — because size changes risk even when trust has not moved.
Two final habits round out the structure. Confirm the beneficiary account by phone on a known number before every first wire to a new beneficiary — payment fraud in sourcing is a document problem, not a hacking problem. And keep goods in transit insured to your own interest; the goods belong to whoever holds the risk at each incoterm, and "the factory usually insures it" is not a policy.
We structure payment-and-verification sequences as standard practice inside our sourcing engagements — the deposit, the inspection gates and the balance release designed as one workflow. For the verification that should precede any first wire, read how to verify a supplier in China.
Frequently asked questions
Is a 30% deposit standard, and can it be lower?+
Around 30% with the balance before shipment is the common default, because it roughly matches the factory's material outlay — but it is a convention, not a law. Lower deposits are negotiable on small orders, with verified partners or when the factory has materials on hand; what is rarely negotiable is zero deposit, because no factory finances materials for an unknown buyer. Spend your negotiating capital on gating the balance to inspection rather than shaving the deposit: the balance is where your exposure concentrates.
The factory wants the balance before shipment. Should I refuse?+
Understand what it is asking for: cash before the goods leave its control is the factory's preference, not a market rule. A workable middle ground is balance against evidence — payment released the same day the pre-shipment inspection report passes. Factories accept this readily once the inspection is scheduled and professional, because it removes their own fear of endless disputes. A factory that refuses any verification gate after accepting your deposit is telling you something the price did not.
When is a letter of credit actually worth it?+
On large first orders with counterparties you cannot yet verify deeply, in trade relationships spanning jurisdictions with weak contract enforcement, or when your own finance team needs the documentary discipline a bank imposes. It is usually not worth the fees and friction on small and mid-sized orders, where an inspection-gated T/T structure delivers comparable practical protection at a fraction of the cost. Match the instrument to the exposure, not to the anxiety.
What is the biggest payment mistake buyers make with new suppliers?+
Not the terms — the order size. A 30% deposit on a container you cannot afford to lose is a worse structure than 100% advance on a trial you can. Keep first-order exposure small, verify before wiring, confirm bank details by phone on an independently known number, and scale commitments as evidence accumulates. Terms design cannot rescue an exposure problem; only sizing can.
