5 Ways to Pay Suppliers in China: An Analysis on The Pros & Cons
China is the world’s largest manufacturing nation and the world’s largest exporter. So if you sell your own goods, chances are you work with suppliers in China.
While Chinese suppliers are typically known for quick turnaround times and affordable rates, because of strict capital controls in China, sending payments can often be a hassle – especially if you’re a young business or SME.
There are a variety of ways you can pay a Chinese supplier (some easier and cheaper than others), but the method that’s best for your business depends on a number of factors. To help ·you evaluate the right way for you, we put together a short and sweet guide to compare the most common methods.
Here’s a pros and cons analysis of 5 common methods to pay your suppliers in China.
Method 1: International wire transfer
Perfect for: Large companies who have room to pay international transfer fees
In general, bank wires are normal business practice. Especially when it comes to most smaller-scale factories, this is the method of payment they prefer.
- It’s simple and straightforward. Most of the time you can simply head into your bank branch (or through your bank’s e-banking portal) and make the transfer through there.
- No additional set-up. You don’t have to set up any additional accounts or start anything new.
- There are expensive international transfer/SWIFT fees. Typically an international wire to China can cost anywhere from $20-50 USD. Charges come from fees from your bank and the recipient banks, correspondent banks in the SWIFT network, and currency conversion. For SMEs or young companies, this can add up.
- You may have long wait times, as international transfers typically take a few days to arrive.
In general, when it comes to wiring money into China, you should also be prepared to provide a lot more information about your transfer. For example, you should have details of your invoice and shipping company, and basically be prepared to explain what the purpose of your transfer is for
Method 2: Make a local transfer from a business account in Hong Kong
Perfect for: If you have a recurring business relationship to a Chinese supplier and need a streamlined way of making regular payments
In order to avoid international transfer fees and wait times, what a lot of Western businesses do is set up a business account in Hong Kong and pay their suppliers from there.
Many Chinese suppliers actually have their business accounts in Hong Kong, due to the ease of transferring money in and out of Hong Kong (especially when compared to China). What’s more, because a lot of the time they do business with Western companies, it’s quite normal for them to deal in USD.
- It’s a local transfer. That means you avoid international transfer complications,like funds lost in conversions and transfer fees
- Sending money to Hong Kong is uncomplicated. With an account in Hong Kong, you avoid logistical complications that come with moving money in and out of China
- Setting up a business bank account in Hong Kong is tough, especially for SMEs or startups. When it comes to Hong Kong banks, they require you to visit a branch in person and the process can take months.
While setting up a bank account isn’t the easiest to do in Hong Kong (to say the least), there are other FinTech alternatives that can help. Built for cross-border entrepreneurs, Neat offers online incorporation and business account set up, which you can complete even if you’re not physically in Hong Kong. Check out Neat’s incorporation package here.
Method 3: Transfer funds from your PayPal account to theirs
Perfect for: Remitting the initial deposit on your order
While PayPal isn’t super popular in China, it’s still a viable option many opt for, especially because it feels familiar to a lot of Western entrepreneurs.
Sometimes for the initial deposit, businesses will remit the money through PayPal, as it ensures you’re sending the money to a legitimate account.
- These transfers are usually instant. So if you both have PayPal accounts, this can be a very convenient option.
- It’s a familiar and trusted payment method for most Western entrepreneurs
- High transfer and conversion fees
- Your supplier in China has to use a third-party remittance company to withdraw the funds from their PayPal account into their bank account (which also costs an additional fee). This step can take up to 2 days.
Once again, many Chinese suppliers don’t like working with PayPal.
Method 4: Remit the payment through a specialized remittance company
Perfect for: If you’re sending a one-off payment and don’t want to spend as much on bank fees
For SMEs and young businesses, bank fees can add up. An alternative popular with SMEs is to send money through a third-party remittance company, such as Western Union or Lianlian Pay.
These companies typically don’t use the SWIFT network, so a lot of the time you don’t have to deal with as many hidden fees. Typically, remittance companies have their own bank accounts and funds available in various jurisdictions, and process transfers locally.
- You typically get lower rates, since you’re skipping the SWIFT network
- Transfers are quick, and are usually can be completed within 24 hours
- Depending on the provider you choose, sometimes this can cause reconciliation complications for your beneficiary, as the transfer won’t be recorded as coming from your company name, but the remittance company’s
- There aren’t a lot of companies in the market that are specialised for remitting to the Chinese market.
- Most Western remittance companies are unfamiliar in China, so smaller Chinese suppliers may not accept this kind of payment
Some FinTech companies with remittance companies to offer the same benefits that you’d get when going through a remittance company directly, like Neat. Being a Hong Kong-based company, they make it a priority to ensure remittance partners are strong at making payouts to China and other Asian countries.
Method 5: Use Alibaba Trade Assurance
Perfect for: If you’re just starting out with a new supplier and want to ensure the quality of the final product
If you haven’t worked with a supplier before, you might feel comfortable using something like Alibaba Trade Assurance, which will cover you in the event your goods haven’t been manufactured the way you ordered.
To put it simply, Alibaba Trade Assurance works like this:
You wire the money to Alibaba, and they keep it in escrow. Once you’re happy with the final products, they’ll release the funds to your supplier. In the event that the product is subpar, you can withhold your payment, or even retrieve the amount from escrow.
- You protect your money and can ensure the quality of your goods
- It’s a Chinese service specialized for the Chinese market – meaning you don’t have to worry about compliance with changing Chinese policies around capital control
- Most Chinese suppliers don’t accept Alibaba Trade Assurance, because Alibaba takes a cut of their profits
Typically, it’s only the larger and well-established Chinese suppliers that’ll have the option to pay with Alibaba Trade Assurance.
Choosing the best payment method for your business
Sending money to China can sometimes be a headache.
There are a number of ways you can choose to pay your Chinese suppliers, but keep in mind that in general, most suppliers do prefer wire transfers.
Take into consideration your business relationship – if you’ll be doing one-off or very infrequent orders, it might make sense to send funds with a third-party remittance company.
If you’re regularly going to be making transfers with suppliers in China, however, it might be worth taking the plunge and setting yourself up for success with a Hong Kong business account.