How to broker favorable payment terms
Why pay via your sourcing agency?
First thing first: we are talking about sourcing agency you trusted.
1. Security
Pay via sourcing agency allows your agency to keep an eye on the manufacturer, and your agency is local people who familiar with rules under the table and know to play them.
2. Cut off processing fee
One charm about sourcing agency is that they know the way to get money across border with lower rate legally.
Additionally, you can make a one-time payment to your agency and have them negotiate the payment terms with manufacture, hence no need to worry about processing fee for different phase of payment terms.
How to pay via sourcing agency
What is Payment terms
Payment terms are the rules a seller imposes on a buyer that specify the proportion of the total value of the purchase order that the buyer will pay the seller at different points throughout the production process. These terms can have several combinations. Let us take for instance the 30:40:30 configuration. This commonly means 30% down payment, 40% after a quality inspection and shipping, and 30% upon receiving the shipment.
Payment terms for tooling, trial run, and mass production
| Purchase Type | Down payment | Approved quality inspection and shipping | Delivered to your agency |
|---|---|---|---|
| Tooling/sample | 50% | N/A | 50% |
| Trial run | 20% | 40% | 40% |
| Mass production | 30% | 40% | 30% |
How you win by negotiating favorable payment terms for yourself
As a buyer, here are three main reasons why negotiating for favorable terms is worth the time and effort you spend on it.
1. Cash flow: The less money you pay upfront, the more cash you have to run your business. This breather of a month or two before the next payment is especially valuable for smaller businesses, which have a relatively tight cash flow.
2. Gives you leverage: If the payment terms specify that the second or final tranche of payment will only be made after a quality inspection, this gives you some control over the supplier. It will be in their interest to ensure that your product matches the exact specifications and if that is not the case, you have the leverage to insist that they fix the problem. Leverage is also why you generally do not make a 100% upfront payment.
3. Protects you from risk: The less money you have paid your supplier towards the start of production, the less risk for you in case things go wrong down the line.
