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If you want to import goods from China, figuring out the best way to pay can save your business time and money.
You’ve heard terms like wire transfers, and letters of credit. How do they differ from just paying by credit card or PayPal, and how do you choose?
This simple guide takes you through 9 possibilities. For each, we’ll look at how many suppliers accept these payment options, the risks of each, and the costs involved. Read on for more.
If you’re looking to make frequent transfers to your Chinese suppliers, consider using the Wise Business account.
International payments with Wise are often far less complex than other payment methods. You sign up, pay in your local currency, enter your supplier’s bank information, and then your supplier gets paid in US dollars or Chinese yuan.
If you’re sending payments to Hong Kong, you can pay in Hong Kong Dollars or US dollars - without having to open an account in Hong Kong.
The supplier doesn’t have to sign up anywhere. For them, it’s just like receiving cash into their bank account. Both you and your supplier may also be able to manage the balance of risk by combining Wise payments with escrow, local agencies, or deposits.
Transfers are made at the mid-market rate – the one you see on Google. That makes Wise quite different from other forms of international payments.
Wise is up to 6 times cheaper than alternatives. If you enable your Wise multi-currency account, you can store your money in different currencies, and then send it to China when the time — or rates — are right.
|To get your Wise account set up for sending US dollars to China, you can register with Wise Business for free.|
International wire transfer is a common payment method and is widely accepted by Chinese companies.
There are risks on both sides. Suppliers will often insist on a deposit to lower their risk which subsequently then increases yours. The more customized or hard-to-sell the goods are, the higher the deposits will normally be. As such, it’s best if you have a good relationship with your supplier.
Just like with cash, you’ll bear the cost of the foreign exchange transaction. That cost includes the published fee, probably several fixed SWIFT fees from intermediary banks, and the spread — the poorer exchange rate than you can find with a currency converter online.
So although wire transfers may be a common method of payment, they cost the buyer much more than most realize.
Escrow protects both parties. It means that you pay an initial deposit before dispatch, but the funds are held by a third-party. The third-party won’t release the funds to the supplier until you’ve received your goods.
Although popular within China, acceptance for international transactions is still low. However, if you’re buying through Alibaba, you might be offered payment using Alipay Escrow.
The idea of escrow is to reduce risk due to the long wait between order and receipt. There are still disputes, though, and it can be hard to get the dispute resolution team working on your behalf.
Fees are around 3.25% of the transaction.¹ With a provider such as Escrow.com, transactions with a buyer outside the United States will be charged an additional $25.00 to cover any intermediary bank fees.¹
Escrow can be convenient for low-value transactions. Though you might want to skip them on larger transactions due to both the added expense and the reality that it can tie up your money for some time.
Larger suppliers and international trading companies are normally happy to accept LCs. Some may even insist on them. However, due to the complexity and additional language barriers, it’s not uncommon for small and medium-sized factories to be reluctant to accept this form of payment.
LCs reduce the supplier’s risk that the buyer doesn’t pay. As a buyer, LCs also give you some comfort that the supplier will conform to whatever terms you agree.
On the flip side, though, the fees are very high and the paperwork is quite complex. As such, it’s essential to get professional advice with your first transactions.
In essence, Letters of Credit are quite an expensive option. They are often only for very large transactions, or when suppliers make it a condition of business.
As mentioned, acceptance of escrow for international transactions is low. However, if you buy through a local Chinese office, acceptance is much higher. That’s why some importers use a local sourcing agent to buy their order, using an escrow arrangement.
The risks are much lower, as long as the communication is crystal clear. However, the agency can reject the goods and keep the escrow payment.
Using an agency also adds another layer of expense to the deal.
Sourcing agencies may be suitable for small transactions if you want to pay extra to avoid risk.
Not a lot of Chinese suppliers accept PayPal yet, but the number is growing. It’s becoming more popular for small transactions, especially electronics sales.
Although PayPal has focused on buyer protection, there are still some risks. Their protection policies are complex, particularly for international transactions. If a dispute arises, it can take time to make your claim and, of course, you might not win.
Fees are charged as a percentage and there are also substantial exchange rate costs. If you’re buying small quantities or samples, PayPal can be a convenient way to pay. However, the fees increase quickly as the size of the transaction grows.
The bottom line is that PayPal may be convenient for low-value transactions if it’s an option. But may be too expensive for serious importers making large orders.
Western Union (WU) is widely accepted for small or medium-sized transactions. It’s popular with suppliers because it’s fast, easy to use, and cheap — for them.
WU can be convenient for small to medium transactions.
However, there are risks. You have little protection once you send your money. You shouldn’t consider WU unless you know and trust your supplier.
Although published fees are low, you’ll end up paying more for your goods. This is because WU makes money through currency exchange.²
If you do a quick search for the currency pairs on Google, you’ll find quite a difference. But you won’t see the mark-up in their online price calculator — you’ll have to create an account and sign in to find out the rate they’ll offer.
A few technology suppliers accept card payments these days. The risks are low for you as the buyer, but high for the supplier. Fraudulent buyers can lead to high losses for the seller. Which makes cards an unpopular way of doing business among Chinese suppliers.
Fees are also high — and suppliers will pass them on to you wherever they can.
As a whole, card payments are not only unpopular with suppliers, but they’re also quite cost-prohibitive for many buyers.
Suppliers love cash, and Chinese suppliers are no different. Paying by cash is common in China, and cash discounts are sometimes available.
For you, however, it’s the riskiest way of paying. There’s little protection if you’re unhappy with your goods.
You still face costs, particularly the expense associated with any foreign exchange transaction. You’ll need to check what exchange rate mark-ups you’ll face in addition to the stated fee.
If you boil it down, though cash is popular in China, it’s quite risky for you. Not only that, but you’ll need to beware of hidden charges in the exchange rate.
|Pay vendors and bills for up to 19x cheaper than PayPal|
|Join Wise Business today|
Sources checked March 23, 2022.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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