Ranking alongside desk research, initial contact, negotiation, and due diligence checks, the payment procedure is an important part of the payment procedure. Telegraphic Transfer (T/T), Collection, and Letter of Credit (L/C) are the three usual types of payment terms.

Telegraphic Transfer Payment Method

Telegraphic transfer is the most popular of the payment methods and is welcomed by all suppliers, especially in China. Telegraphic transfer, however, may not always be fully acceptable to buyers. It may cause some problems between buyers and sellers during negotiations, because it involves direct transfer of funds.

There are three reasons why telegraphic transfer is preferred by suppliers:

First, the use of telegraphic transfer minimizes risk. Minimizing risks naturally important for suppliers. They would always like to have all, or at least part, of the money in hand. This will help the risk be minimal in case the buyer cancels the order after the production has been completed.

Second, in telegraphic transfer, capital flow is maintained. In a firm, maintaining the flow of capital is always extremely important. In the current economy, however, it is even more important. The supplier’s investment in new raw materials can significantly be enhanced if they have all or most of their money in advance.

Third, telegraphic transfer helps deal with RMB appreciation. China started exchange rate reform in 2005, and the exchange rate between the RMB and the US Dollar has been climbing continuously for several years. The RMB appreciated by about 13% in 2007 and by about 7% in 2008. This caused a great deal of pressure for suppliers. Many suppliers are afraid of the rapid change of the RMB, and want to obtain their payment within 20-30 days. Getting their money as soon as possible is important aspect of all Chinese suppliers.

These are not the only concerns. There are other concerns as well which lead to the Chinese suppliers preferring telegraphic transfer payment. Not only is telegraphic transfer quick and convenient, some plants just don’t have enough experience to handle either Collection or Letter of Credit. Fraud is prevented by using telegraphic transfer, so a lot of plants will at least require down payment by this method.

There are reasons still, but these are the major ones. It is important that there be an open line of communication and that there be mutual understanding in any business relationship. It will help both the buyer and the seller when closing a deal. Once a relationship is developed, it would be beneficial for both parties to use a mixed payment method. This could be an initial telegraphic transfer down payment with the balance by letter of credit. Usually, a down payment of 10-20% and the remaining 80-90% at shipping is a popular way to settle the payment terms in the contract. It is important the buyer base their contract negotiations on comprehensive due diligence checks and a thorough investigation of the supplier.