China Payment Terms: T/T, LC, Escrow

Payment terms are where sourcing deals go wrong. Not because of fraud (usually) — but because buyers and factories have opposite incentives, and poorly structured terms leave one side holding all the risk.

This guide explains every payment method you’ll encounter sourcing electronics from China, and how to structure terms so you’re not the one taking all the risk. For a broader view of the full sourcing process, including how to find and qualify suppliers before payment ever comes up, see our sourcing guide.

The core tension

Factories want money before they spend on materials and labor. Buyers want goods before they pay in full. Neither is wrong — both have legitimate business reasons.

The result is a negotiation. Understanding the tools gives you an advantage. Before terms even come up, knowing how to read a factory quote line by line tells you which cost items a deposit is actually funding.

Telegraphic Transfer (T/T)

T/T is a direct bank wire. It’s the dominant method for China sourcing because it’s fast, cheap, and requires no bank infrastructure beyond a SWIFT-capable account.

The standard structure you’ll see quoted

30% deposit / 70% before shipment — this is the most common structure for first orders. You pay 30% to confirm the order, factory produces, you pay the balance before they release goods.

Why this is the factory’s preferred structure: they’re covered for materials and most of the labor before you see anything. If you disappear, they have product they can sell elsewhere. If they produce badly, you’re still obligated to pay or walk away from your deposit.

50/50 — more common for smaller orders or established relationships. The factory may accept this when they know the buyer, or when the order is small enough that materials cost is under the deposit.

100% upfront — what factories want from unknown buyers. Walk away from this unless you have very strong trust signals about the factory, or you’re ordering samples.

30% deposit / 70% against copy of B/L (Bill of Lading) — this is the buyer-friendly variation. You pay 70% when the factory hands the goods to the freight forwarder, and they send you a scan of the B/L as proof. Still some risk (goods are on a ship you haven’t inspected), but meaningfully better than paying before shipment.

Structuring T/T to protect yourself

1. Pre-shipment inspection before releasing the balance. Write this into your PO: “Balance T/T released upon successful pre-shipment inspection.” You can hire a third-party inspector for $200-300; the cost is trivial against the protection.

2. Use copy of B/L as trigger. Not “before shipment” — that can mean two days before the boat leaves, after everything is packaged. Against copy of B/L means goods are in the hands of the carrier.

3. Specify the bank account in the contract. Factory bank accounts do change. Get written confirmation of the correct account before each wire. Phone-based fraud where someone intercepts your email and substitutes a different account is rare but real. A factory audit and supplier verification before you place any order is the upstream step that reduces these risks significantly.

4. Wire in USD, not RMB, from a major bank. Cross-border wires in USD route through correspondent banks and have better dispute infrastructure than local transfers.

Letter of Credit (L/C)

An L/C is a bank guarantee. Your bank issues a document promising to pay the factory’s bank when specific conditions are met (documents proving shipment, inspection, etc.). Neither you nor the factory touches the money — it moves bank-to-bank against documentary evidence.

When L/C is appropriate

• Orders over $100,000 where the risk justifies the cost
• Relationships where you don’t trust the counterparty but the deal makes sense
• When your corporate policy requires L/C for imports above a threshold
• When the factory specifically requests it (some larger factories prefer L/C because it’s bankable — they can borrow against it)

Why most hardware startups don’t use L/C

The cost is real: 0.5-2% of the letter value in bank fees, plus weeks of setup time and significant paperwork. For a $20,000 order, that’s $100-400 in fees plus the friction. T/T with good inspection structure often provides comparable protection at a fraction of the cost.

L/C also requires the factory to comply with exact document specifications — a B/L that says “107 cartons” when the L/C says “108 cartons” can trigger a discrepancy that delays payment for weeks. Factories dealing with L/C for the first time often make these mistakes.

Sight L/C vs. usance L/C

A sight L/C pays the factory immediately upon presentation of complying documents. This is what you want as a buyer — the factory gets paid immediately, so there’s no interest cost baked into your price.

A usance L/C (also called “deferred payment” or “term” L/C) pays 30, 60, or 90 days after shipment. This is effectively a credit facility — you get the goods now and pay later. The factory usually prices this in (higher quoted price to cover their financing cost), but it can be useful for managing cash flow.

Documentary Collection (D/P and D/A)

D/P (Documents Against Payment) and D/A (Documents Against Acceptance) sit between T/T and L/C in complexity and protection. They are documentary collections handled bank-to-bank, but without the bank guarantee of an L/C.

With D/P, the presenting bank releases shipping documents to your bank only after you pay. You cannot collect the goods without paying, but the supplier has already shipped — so you have negotiating power if the goods are wrong, but only after they are on the water.

With D/A, you accept a draft promising to pay at a future date (30, 60, or 90 days) in exchange for the documents. This gives you credit terms, but less recourse if shipment quality fails.

D/P and D/A are uncommon in SMB electronics sourcing. Setup is slower than T/T, fees are $150-400 per collection, and most Chinese factories below $1M annual revenue have limited experience with them. They become relevant for recurring orders with established suppliers who want documented payment security above $50,000.

Escrow

Escrow services hold the buyer’s payment until delivery and inspection conditions are met. Alibaba Trade Assurance and various third-party services offer this.

Trade Assurance (Alibaba)

Trade Assurance is Alibaba’s built-in escrow. You pay Alibaba, Alibaba releases to the factory after delivery confirmation, and Alibaba handles disputes. The protection includes refund coverage if the factory ships the wrong goods or significantly below-spec product.

When it works well: Small orders ($1,000-20,000) with Alibaba-listed suppliers. The verification that a supplier is listed on Alibaba and has Trade Assurance history is itself a meaningful filter. If you’re still weighing platform escrow against going direct, our sourcing agent vs Alibaba comparison covers where each model leaves you exposed.

Limitations: Only covers purchases through Alibaba. Once you move to direct factory relationships (which you should, eventually), you lose Trade Assurance. Dispute resolution is slow (4-6 weeks typical) and favors documented claims, not emotional ones.

Pro tip: Even with Trade Assurance, file a claim with detailed photo evidence of defects — not just “quality not as agreed.” Document specific measurements, certifications, defect categories. Trade Assurance disputes that win are the ones with clear before/after specs.

Third-party escrow for direct factory deals

For orders above $20,000 where you want escrow protection outside Alibaba, services like TBF Group’s trade escrow or specialized import/export escrow providers can hold funds against Bill of Lading and inspection sign-off. Fees typically run 1-3% of order value. The key is defining release conditions precisely: “Release 70% upon presentation of clean B/L and third-party inspection report showing zero critical defects.”

Payment fraud and invoice verification

Invoice fraud is the payment risk buyers underestimate most. The attack is simple: someone gains access to the factory’s email, watches a quote negotiation, and sends you a payment instruction with a different bank account. You wire the deposit to the fraudster’s account. The factory never received it and still expects payment.

Protection steps:

• Call the factory at a number you found independently (not from the email thread) to verify bank details before the first wire.
• Confirm account name matches business registration. The account holder should be the manufacturing entity, not an individual or unrelated company.
• Use two-factor confirmation for any last-minute change to payment instructions.
• Keep bank details in the signed contract or PO appendix, not only in email.

A verified supplier from our supplier verification guide is a prerequisite for safe T/T payments. Skipping verification to save $200-500 in audit cost is poor economics when a single deposit can be $10,000-50,000.

What to actually do at each stage

Samples / prototypes: 100% T/T upfront is standard and reasonable. The factory is doing custom work, quantities are low, and you’re establishing the relationship. Don’t fight this.

First production order: 30% deposit / 70% against copy of B/L, with pre-shipment inspection as a condition of releasing balance. Before committing to a factory, run through our factory audit checklist — the time you spend verifying the supplier upfront pays off when payment terms are being negotiated. A factory that won’t accept pre-shipment inspection or provide CE marking or FCC certification documentation is a red flag. We used this structure on a Bluetooth speaker order for an EU startup, splitting the balance payment around inspection and B/L copy. The same 30/70 structure works for industrial IoT gateways, LED panels, smartwatches, and home energy storage systems.

Repeat orders with a trusted factory: You can relax terms. 30/70 is still standard, but you might get to net-30 against invoice (essentially open account) with strong partners. This is earned through order history, not assumed — and is exactly the kind of position that builds under ongoing supplier management. It tends to come fastest in high-repeat categories like consumer electronics and IoT modules. Verify that reorders use the same JST connector and terminal-block specs as the original PO so payment terms are not the only thing that stays consistent.

Large orders ($100k+): Consider L/C, or at minimum split shipments so you’re never paying 70% of a very large order before you’ve seen any of the goods. On a $120,000 LoRa gateway order, for example, we split into two shipments with inspection between them. Large EV charger or battery-system orders benefit from the same split-shipment discipline, reducing per-shipment exposure to under $70k.

Currency risk

Most electronics components are quoted in USD. Finished goods are often quoted in USD but manufactured in RMB. When RMB appreciates (as it has done generally over time), factory margins compress. Factories absorb short-term fluctuations, but a 5%+ move in your negotiating window can change your quoted price. For a deeper look at hedging and contract language, see our exchange rate risk guide.

Lock your price in the PO in USD with language like: “Price is fixed at $X USD per unit regardless of currency fluctuation.” Not all factories will accept this, but established ones usually will for order windows of 90 days or less.

Payment methods compared

Summary: a decision tree

• Order value < $5,000: T/T, potentially 50% or even 100% upfront if it’s a test order. The risk is manageable.
• $5,000-50,000: 30% deposit / 70% against copy of B/L with inspection condition. Use Alibaba Trade Assurance if supplier is listed there.
• $50,000-200,000: Same structure, but make inspection non-negotiable and consider splitting into two shipments. D/P or escrow become worth evaluating.
• $200,000+: Talk to your bank about L/C, or use an escrow service with explicit conditions. Consider phased delivery.

The goal isn’t to eliminate risk — it’s to balance risk appropriately between buyer and factory so neither party has all of it. In a soft market with PMI below 50, buyers often have more room to negotiate payment terms than during peak demand — see the China electronics manufacturing May 2026 update for current conditions.

Working with a sourcing agent on payment terms

If you’re placing your first order through a China manufacturer, structured payment terms are one of the things a sourcing agent handles on your behalf — negotiating deposit structure, linking balance payment to inspection sign-off, and verifying bank account details before each wire.

Payment terms checklist

Before signing any PO, confirm:

• Deposit percentage, trigger, and currency are specified
• Balance payment trigger is inspection + B/L copy, not just “before shipment”
• Bank account details are verified and match business registration
• Inspection standard (AQL sampling plan) is defined
• Currency fluctuation clause is included or explicitly excluded
• Payment method is appropriate for order value and supplier maturity
• Dispute resolution jurisdiction is specified in the contract

Use this checklist on every order, not just the first one. The suppliers who change bank accounts or push for earlier payment are often the same ones where inspection finds issues later.