Why Payment Terms Matter Beyond Cash Flow
Payment terms affect more than your cash position. They affect your leverage, your risk exposure, and the nature of your relationship with the factory.
A factory that has received full payment before the goods are released has very different incentives than one that is waiting for the balance. This is not a cynical observation — it's a structural reality. Money paid is leverage surrendered. The sequence of payment and shipment is one of the most important decisions in any factory relationship, and it's one that most importers accept rather than negotiate.
The Standard Terms Factories Propose
Most factories open with 30% deposit and 70% before shipment — meaning the balance is due before the goods leave the factory, before you've received them, before you've had the opportunity to inspect them at destination, and often before you've had a chance to identify any issues that weren't caught in pre-shipment inspection.
This is a factory-favorable structure. It transfers nearly all the financial risk to the buyer. You've paid in full. The factory has been paid in full. Any dispute over quality, quantity, or compliance that emerges after arrival becomes a negotiation where your leverage has already been surrendered.
Best Practice: Balance on Copy of Bill of Lading
The most buyer-protective standard payment structure is 10-30% deposit and balance on presentation of copy of the bill of lading.
The bill of lading is the document that confirms the goods have been loaded onto the vessel and are in transit. Payment against copy of bill of lading means you pay when you have confirmation that the goods are shipped — not before. The factory has performed their primary obligation. You retain the ability to contest issues on arrival without having already surrendered your financial position.
This structure is standard in professional import relationships and most experienced factories will accept it, particularly once a relationship is established. Newer or smaller factories may push back on the first order. The appropriate response is to explain that it's your standard terms and offer to adjust the deposit percentage upward if the factory needs better cash flow coverage during production.
Open Account Terms for Established Relationships
With factories where you have a long-standing, proven relationship — typically three or more years of consistent on-time payment — open account terms of 30 to 90 days are both achievable and appropriate to pursue.
Open account means the factory ships the goods and invoices you, and you pay within the agreed term after receipt. This is the standard payment structure in domestic commerce and it's increasingly available in international trade as factory financing options have expanded.
OA terms require trust on both sides. The factory is shipping goods without payment. You are committing to pay within the agreed term. The relationship history that makes this work is exactly the kind of institutional asset that factory scorecards and consistent payment records build over time.
When negotiating OA terms, start with 30 days and demonstrate consistent on-time payment before requesting an extension to 60 or 90 days. Factories that offer OA terms to unreliable payers don't offer them for long — and the buyers who lose access to OA terms are the ones who treat payment timing as a cash flow management tool rather than a relationship commitment.
Letters of Credit: When They Make Sense
Letters of credit — bank-guaranteed payment instruments — were once the standard mechanism for international trade payment. They provide protection for both parties: the factory is guaranteed payment if they present compliant documents, and the buyer is protected because payment requires document compliance.
LC costs — bank fees, document preparation, potential discrepancy charges — have made them less practical for smaller orders. But for large first orders with new factories in new categories, or for transactions where the risk profile justifies the cost, an LC remains a legitimate tool worth understanding.
The Deposit Is Not Discretionary
While the balance terms are negotiable, some deposit is always appropriate. Factories incur real costs before production begins — material purchases, tooling preparation, production scheduling. A deposit acknowledges those costs and demonstrates commitment.
The deposit percentage should reflect the actual pre-production cost exposure, not a negotiating position. A factory producing a highly customized product with significant material cost requires a larger deposit than one producing a standard product from inventory materials. Understanding what the deposit actually covers makes the negotiation more productive for both sides.
What payment terms have you found achievable with established factory relationships — and how did you get there? We'd like to hear what the negotiation actually looked like.