How to reduce your risk when paying a Chinese supplier? Breakdown of payment methods: Paypal, Alibaba Escrow, Bank Wire Transfer “T/T” and best practices

So you’ve found the right supplier who has the product at the right place for you and you’re ready to click the “Pay Now” button.

Paybutton_107x26

But wait – you’re wondering should I use Paypal or Alibaba’s escrow service?  What’s this I hear about T/Ts and L/Cs?  What about Western Union?  Here is an overview of the common payment methods for small business importers and my recommendations.

80/20 rule:

For small volume importers the most commonly used payment methods are:

  • Paypal
  • Escrow “Alibaba Secure Payment”
  • Bank wire transfer or “T/T” – but be sure to negotiate the right payment terms

What NOT to use:

  • Western Union – Carries a high risk of getting scammed because it offers little protection
  • Letters of credit or “L/C’s – AVOID because they involve a lot of paperwork and bureaucracy which isn’t worth your time at this stage.

Paypal

Paypal is widely used around the world. It offers payment protection for buyers, is fast and easy to use.  So why not use this to pay all your Chinese suppliers?  First, Paypal is not widely accepted in China.  Alipay is the standard in China.  Second, though Paypal is free for buyers, sellers are charged fees for this and they will pass this on to you, the buyer.  So that means an additional 4% to 5% added to your order total.  Can you afford this?

Recommendation: Good for samples and small orders.  Also it’s a great way to reduce risk when placing with initial orders with new suppliers who you are still evaluating. But as orders grow larger and trust builds consider moving to bank transfers to reduce costs.

Pros:

  • Widely used around the world (though not popular in China)
  • Payment protection
  • Fast
  • Free for buyers
  • Flexible payment – Can pay using a credit card or by bank transfer

Cons:

  • Not widely accepted by suppliers in China
  • Added cost – Suppliers will typically add 4% to 5% to your total order value which you will typically pay for (whether you are aware of it or not)

Best practice: If you are considering Paypal, ask suppliers in the early negotiations stage (e.g. RFQ and follow up questions) whether they accept Paypal.  You don’t want to spend all your time negotiating only to find out at the last minute they don’t accept Paypal.

Escrow service: Alibaba secure payment

Alibaba besides having their trading platform also offers an escrow service called Alibaba Secure Payment (formerly “Alibaba Escrow”).  The main benefit to you the buyer is that they can hold the funds in escrow until you receive and approve the order.  In case of any problems you can file a dispute and Alibaba will mediate to help you get a refund.

As to whether you can get a complete refund depends on the circumstances.  In case of any quality disputes, Alibaba requires a 3rd party inspection which normally costs US$200-$300 to verify the problem.

Another downside is that it is limited to pre-approved suppliers on Alibaba only.  If you found your suppliers on Global Sources or at a trade show for example, they will not qualify unless they are a pre-approved Alibaba supplier.  In addition not all Alibaba suppliers are willing to accept this because Alibaba charges them a 5% fee for this service (which they will pass on to you) not to mention the additional work and risk for them.

Recommendation: Alipay secure payment is good for paying pre-approved Alibaba suppliers.  Like Paypal, I suggest you use this when paying for samples and small orders.  But do make a cost calculation to find out if it makes sense for you.

Pros

  • Reduces your risk – Alibaba will hold the payment until you receive your order and are satisfied
  • Easy to use if you’re sourcing using Alibaba – Integrates well with their system and no need to create a separate account with an escrow service elsewhere
  • Free for buyers
  • Flexible payment – Can pay using a credit card or by bank transfer

Cons:

  • Limited application – Can only be used with pre-approved suppliers on Alibaba
  • Not all suppliers qualify or will agree to this
  • You must make a full payment which ties up your cash flow
  • Added cost – While this is free for buyers, Alibaba charges suppliers 5% for this service and they will pass on the cost to you

Bank wire transfer or T/T

Many people are intimidated by bank transfers.  In fact this is the most common way of paying suppliers in my experience.  Wire transfers are widely used around the world.  Banks normally charge a fixed bank transfer fee of $30 to $50 depending on your bank.  Obviously this makes sense for larger orders.

Pros:

  • Widely accepted around the world
  • Fixed bank transfer fees which are good for larger orders
  • Costs normally between USD $30 to $50 per transfer depending on your bank
  • Can negotiate for payment terms for smaller deposit upfront and balance paid later – reduces risk and frees up cash flow

Cons

  • Cannot (easily) get your money bank
  • Must be careful with the fine print – any errors in the transfer details will cause tremendous delays
  • Slow – can take up to 5-7 business days

Recommendation: Take advantage of the low fixed costs and use T/Ts for for larger orders with trusted suppliers.

Best Practice: To reduce risk when paying new suppliers, negotiate payment terms so that you pay a proportion of the money upfront as a deposit and the remaining balance upon inspection or delivery.  This will incentivise the supplier to fix problems as they arise (Murphy’s Law).  For example 30% advance payment and 70% balance paid upon inspection and approval.

Here’s a quick comparison chart of Paypal, Alibaba Secure Payment, and Bank wire transfers (click to enlarge)

Payment methods spreadsheet

 

Remember Paypal for small orders, Alibaba Escrow for orders done on Alibaba so long you are OK with paying the 5%, and T/T when orders are ramping up but make sure to negotiate the right payment terms.  I will show you how to do this in a future article.  Please sign up to be invited to my free newsletter to get the article delivered to your inbox.

Case study:

Let’s say you have already placed a sample order and tested the product.  You’re ready to place your next order with a value of about $10,000.  If paying using Paypal it will incur about $400-500 worth of fees.   On the other hand if you use T/T  it will only cost you about $50 (depending on your bank) per transfer.  If you arrange payment terms of 30% advance and 70% upon shipment, it will still only cost about $100.  So it doesn’t take a genius which one makes more sense.

Which payment terms are you using and what problems are you facing?  I look forward to your comments below.

Please signup for my newsletter for a “deeper dive” into these topics.  Good luck!

Author: Gary

I work with many Amazon sellers to help them source from China. I’ve managed multimillion dollar sourcing campaigns and have been sourcing from China since 2008. I also am an Amazon Private Label seller myself so I know what you’re going through. My goal is to teach you how to source from China quickly and easily so you can own a 7-figure online business.

43 thoughts on “How to reduce your risk when paying a Chinese supplier? Breakdown of payment methods: Paypal, Alibaba Escrow, Bank Wire Transfer “T/T” and best practices”

  1. Greetings! Very useful advice in this particular article!
    It’s the little changes that will make the most significant changes.

    Thanks a lot for sharing!

  2. Thanks a lot for the breakdown Gary! This is one area that many fear about given the nature of dealing with Chinese suppliers.

    1. Thanks Sihao! I see a lot of people with fears about that. Stay tuned as I will be release new content about ways to negotiate payment terms to protect your money and reduce risk!

  3. I was actually about to place an order on the site but was skeptical about the payment methods and I have to google search and I stumbled on your site. This has really being helpful and I really appreciate this kind of info as it helps me know what to do and eased my fears. Thank you very much and stay blessed.

  4. I am negotiating a purchase of ~$4000 on alibaba. they accept t/t and alibaba secured payment. they also use trade assurance. they are a gold member of 2 years with 1 recent transaction and onsite verification. i do not believe they accept paypal but another supplier with a longer track record does but im not sure if they provide exactly what im looking for. the first that ive been chatting with and have reached a deal with just told me they needed a logo for the trade assurance contract. should i proceed to do business with them?

    1. Hi Rory, good question.

      Two years is low. How do the other suppliers you’ve contacted look? Have you cast a wide net first?

      Have you requested samples yet? If this supplier is one of your shortlisted ones, I suggest requesting a sample to validate the quality as well as gauge their service and attention to detail. I recommend doing this before committing to a larger $4k order to reduce the risk of any “surprises” later which would be more costly to fix.

      Let me know how it goes!
      Gary

  5. Hi Gary,

    I am based in Australia and have been working on a prototype for a consumer product with a Chinese manufacturer. I have split up the product in to 3 separate components at this stage, with the most labour intensive work being completed in China and the final finishes in Australia. I have done this because I am concerned about IP. I don’t want anyone seeing the full final product yet as I cannot submit a Provisional Patent until I know the exact design and how it will function best, but in order to do this I need to work with the manufacturer to finish it! My question for you is how much use is a Non Disclosure Agreement when working with Chinese manufacturers? Is there anything else I could do at this stage?

    1. Hi Sally,

      Great question. To protect IP it is smart to split up the components among different manufacturers so that nobody has the “entire recipe”. An NDA does have some value but equally important is finding trustworthy suppliers in the first place who will not put your designs all over alibaba. If you’re interested I’ve created a video course to help you identify trustworthy suppliers which you can read more about here. I hope that helps.

      Gary

    2. From someone who has filed patents, unless you file one in China, even if you have a patent in Australia it wont over China, they are country / location specific, so if you have a pattern in USA, Canada and Australia but someone in China or Europe makes it, that isn’t covered under your pattern as breaking the law.

      You are better putting in writing (please do not disclose this work) in some payment so its on file, than play up you have some huge idea, making it sound like its HUGE will put you on there radar to copy.

  6. Hi Gary, great blog!.

    I would like to ask you something. I’m ready to place an order on Alibaba. Supplier send the Order thru Alibaba and I can see it on my dashboard. Order is “Secure payment”.

    On FAQ, Alibaba says “Secure Payment” is for products purchased on Alibaba’s “Wholesaler” site. Can a supplier send me directly an Order with “Secure payment”?. If “Secure payment” is to buy on “wholesaler” site, how can suppliers send invoices directly?. Can they?.

    It also says “Secure payment” is for “Express shipping orders”. Supplier will send to port but not using express shipping. I will do my own Air Cargo.

    I appreciate your feedback. Thanks!.

    Max

    Any help will be appreciated!.

    Max

    1. Hi Max,

      Thanks for the question, and please excuse for the late reply! We don’t pay through Alibaba so I really cannot comment. I’d try contacting Alibaba customer support if you haven’t already.

      Hope that helps!
      Gary

  7. Hi Gary,

    Quick question about requesting samples.

    I’m currently down to my final 3 suppliers for my first product, but I am somewhat stuck on the sample request. I have spent many days talking with the reps over WeChat and email to determine the quality, look, finish of my product through photos and mockups, but my product is more custom than just changing a color or two. (ie. new molds are needed for a few pieces of my project.) (Total product order will be 1,000 units ~ approx. $15k)

    What other steps can I take to determine quality before just picking one supplier & paying a deposit, just to see the first production sample? If supplier 1 turns out to be less than what we discussed, am I stuck with them to determine a fix for the actual product, or can I easily move on to supplier 2 by cancelling the order?

    Thanks for your detailed website,
    Ryan.

    1. Hi Ryan,

      Great question. First off, have you ruled out that no other suppliers can manufacture this product with their existing equipment and tooling? That would be the fastest and cheapest way. I suggest casting a wide net first contacting up to 20 suppliers to find if they can manufacture your product without additional tooling fees.

      If after you’ve done your research and found it indeed requires customization, I would thoroughly check the company history, export experience, 3rd party certifications, their existing product line to see if they have experience in making similar products, as well as requesting samples of other similar products first before deciding on this supplier and paying the tooling fee. Once you pay the fee then you are basically stuck with them (unless you ask to take it back which is a frustrating and time-consuming process). Also gauge their customer service level and English to understand your requests.

      Long story short, choose your supplier carefully!

      Good luck
      Gary

      1. Thanks for the response Gary.

        Yes I have reached out to about 15 suppliers originally. 10 of which seemed to be in the correct manufacturing “common thread”. And 4 that have experience with the product I’m looking to customize. However, none have the exact specs to start. I have been told by two, that they have actually checked with their known supplier “friends” (mutual manufacturers) that no one has the exact specs I am looking for. However they basically have a similar end product, but that doesn’t necessarily help me with knowing they can make my product the way I would like.

        Oddly enough the very first supplier I have been working with has been one of the most responsive and understanding for the end goal. They make a similar product to the one I would like but not quite this model. Would you suggest receiving the other vendors’ similar samples first before you would move forward? Or if, like you say, feel comfortable with the level of response and understanding, take the chance with that supplier? I have made my top 2 fill out vendor profiles and provide documentation on their factories.

        Thanks for your response,
        Ryan.

        1. Hi Ryan,

          Thanks for the followup. With your shortlisted suppliers, I recommend you order samples of similar product to gauge their product quality as well as attention to detail and customer service before deciding to move forward with committing to paying any tooling fees.

          Hope that helps,
          Gary

  8. Thanks for the article. Question for you: With many orders I’ve placed with suppliers they will line item “Bank Charge” on their PI. Is it common practice for buyers to pay banking fees? Here in the US it’s a cost of doing business, I don’t ask them to pay my bank fees. Is this just a tactic to try and squeak more money out of a deal?

    1. Hi Alan,

      Thanks for your question. Can you tell me more about the background and how you are paying them: i.e. T/T, Paypal, etc? If Paypal it’s common for the supplier to add up to 5% onto the order value for the sake of your convenience.

      For bank transfer or T/T normally the buyer is only responsible for their own bank charges and the beneficiary would be responsible for their bank charges.

      Hope that helps!
      Gary

  9. The supplier is insisting me to pay via TT, to avoid Alibaba fees, and paypal fees but still there is a transaction fees they added 30 dollar for each transaction. I will actually pay 30 dollar or something to my bank and they want me to pay 30 dollar for their bank too.

    I dont think their bank charges for incoming fund? can you please help. otherwise I will have to pay double fees just because I dont know.

    Its about 1000 dollar order, would paypal is recommended? I have 60 dollar transaction fees budget anyway.

    1. Hi Niraj,

      Thanks for your question. For a $1,000 order paid by Paypal, fees should be around 5% or less. Have you tried telling your supplier that you will pay the 5% Paypal fees? If they don’t accept that you can consider paying by Alibaba Trade Assurance. It’s around the same cost but tell your supplier that you will offer to pay the 5%.

      Double bank fees does not sound right. Normally the sender pays for their bank fees and the beneficiary pays for theirs.

      Hope that helps. Let me know how it goes.
      Gary

  10. Hi Gary,
    We’ve been searching for suppliers for a while on Alibaba. Finally selected a couple, requested samples and liked one sample over the other.
    When we contacted the supplier to place the order, they now say they do not want to accept the order via Alibaba and only accept payment via TT.
    The order is about $2k. I’m a bit paranoid about sending money via TT with no recourse for dispute. However, this provider is the only one that makes a specific brand that is of interest to us.
    What do you recommend for a first transaction?

    1. Valeria,

      Thanks for your question. Before we get into that, have you negotiated payment terms yet? Be sure not to 100% upfront if you’re not familiar with this supplier. I’ve written an article about payment terms that explains all the scenarios you can consider. Hope that helps!

      Gary

  11. Hello Gary

    I am really impressed with all the feedback you have given.

    I nearly fell prey to some dodgy company who contacted me through alibaba. They offered some phones, laptops, tvs and other items at a very low rate. I did question myself a lot about how come they can sell a £3000 tv for $150 .

    I requested to pay through either paypal or alibaba and they refused. They insisted i pay through Western Union and they gave me someone’s name to pay. I wasn’t convinced and so i messaged them then i can’t send the money. They emailed me to say i can pay through Western Union and give the MTCN code but not the name of the sender. They will verify the money has been sent and they will ship the goods. Once inspected and i am satisfy i can then give them the senders name so they can collect the money form Western Union.

    I spoke to Western Union customer service and the first lady informed me without the senders name they can not collect the money. I rang western union the next day and the gentleman i spoke to told me they don’t need the senders name to claim the money. You can imagine how confused i was.

    I discussed this with my dear friend and he told me emphatically that they can take the money as soon as they receive the MTCN number

    I discussed this with my good friend who told me emphatically that they will take the money as soon as i send them the code.

    I dug a lot more into them and found them to be fraudsters all thanks to my friend.

    I hope people can leave from my experience never to use Western Union and especially transfer to someones name.

    I am looking to make my first business purchase and very nervous. I hope things go well after all the research i have done.

  12. Hi Gary,thanks for taking the time out of your busy schedule to inform us about purching on Alibaba..I would like to purchase a alkaline water machine from EHM on Alibaba but I have my reservation,because I want to pay with my paypal card,but they are saying that it is only accepted for offline purchase..I have no idea how to go about purching this machine..I am not starting a business..I need this machine for my personal use..

  13. Is it common to pay additional 50$ as part of custom clearance in China before goods can be shipped to my country (Ghana). Although i will also have to pay custom duties in my country before receiving my goods. A supplier just added 50$ dollars to my bill. I opted for the Alibaba trade assurance instead of the western union she proposed and she pointed out that with Alibaba they will go through formal channels to custom clearance in China so i need to pay the custom clearance fee. Is this true or do i need to be worried.

    1. Hi Lorraine, Thanks for your question. What type of Incoterms (i.e. FOB, EXW, etc.) did you negotiate with the supplier? If FOB then you shouldn’t have to pay any additional custom clearance fees since the supplier is responsible for getting the Free on Board onto the ship. I hope that helps. Gary

  14. I am contacting a supplier on alibaba and they claim to be the manufacturer of an item sold by many companies on alibaba. They seem to specialize in this type of product where the other companies sell an array of different products. This convinces me that I actually found the manufacturer.

    However, they don’t accept PayPal and they just told me that they don’t accept Alibaba payment. They are only willing to take bank transfer.

    Also, they are only a gold supplier for 1 year and have had an onsite inspection (at least Alibaba says they did).

    They also tell me that I don’t trust them since I want to use PayPal. I am trying to get just a sample and payment is proving to be a problem.

    Please tell me if this looks like a red flag

    1. Aryeh, Thanks for your question. Many factories do not accept PayPal because it’s a pain in the butt for them to clear this payment – btw I wrote an article reviewing the pros and cons of different payment methods that might be helpful for you. I wouldn’t say it’s a red flag but it definitely is a sign when they are mistrusting you from the onset. Are there other suppliers that you are considering who have been more cooperative? -Gary

  15. I stumbled onto your site. My initial attempt to invest is very small, about $250. One of the options to pay is by sending a Moneygram. Is this something to stay away from also? I think it works similar to Western Union. I have submitted a Moneygram order but fortunately Moneygram has questions before they can process so I have not gotten back to them yet and no payment has been sent. I found the supplier through Alibaba and placed the order on the suppliers website. What I find odd is that the supplier provided me a name of a person to send payment to. Anyway, I am wondering on your thoughts. Thank you.

    1. Hi Troy,

      You are correct. I believe Moneygram does not offer any recourse if anything goes wrong so I recommend to stay away. For a small order of $250, I suggest you pay by PayPal. Hope that helps!

      Gary

  16. Hi Gary,

    I am extremely intrigued with your blog! You have done a great job here. I am working with a supplier that I have never felt with before. They accept PayPal (which is they way I would like to go based on your suggestions), T/T, and Western Union. They said they can only take care of their side of customs (Hong Kong) and that I should keep that in mind. I have never had to deal with customs before… should I be concerned? They said the ship via DHL and this is a small order (under $400).

    Should I go forward with them? What should I look out for here specifically?

    1. Hi Trever,

      This is entirely normal. In fact it is good that they are transparent about the custom fees with you. For air freight on small orders like this, DHL and Fedex does not normally require a formal customs clearance. In other words they will take care of it for you and all you have to do is pay the shipping fees and fill out the shipping air waybill. I recommend doing it this way.

      For larger shipments with order values of $2,500 or more, then you would have to deal with formal customs clearance, potentially applying for a customs bond, as well as paying customs duties.

      But in your case since your order is only $400 you wouldn’t have to worry about it.

      Hope that helps – Good luck!
      Gary

  17. Thank you for such a great post. I, like others who have commented, am sourcing items to start a event rental company. I have ordered samples from two sources and I am waiting on a third that I think will be the winner. I am nervous about spending 15k, however the supplier has been a gold member on Alibaba for 14 years and seems reputable. Are there any other signs that can indicate if the supplier is a good choice?

    1. Hi Bryant,

      A gold supplier on Alibaba, while of itself doesn’t mean much, with 14 years history definitely stands for something. At least they have been doing business for a longer period of time than many 1-2 year gold suppliers and this suggests more stability. But it’s no guarantee. If you’d like to learn more, I’ve created a video course on “How to find a trustworthy supplier”. It may be a smart investment before you pay this supplier.

      Additional questions to consider include:

      With $15k, what type of payment terms have you negotiated?

      Have you considered arranging a pre-shipment inspection and have you informed the supplier accordingly?

      Also be aware that Chinese New Year is right around the corner and your shipment probably won’t be delivered until a month after the holiday at the earliest.

      Hope that helps. Please let me know if you have any questions.
      Gary

  18. Hi Gary! I was going to go through with a $450 purchase on a near $3000 laptop, The company has been gold verified for two years and accepts VISA, PayPal and has Trade assurance.

    How can I be sure the company is selling the real product when it seems as if it’s to good to be true?

    1. Hi Daniel, Thanks for your question. As a general rule of thumb if it sounds too good to be true, then that’s a red flag. I’d be very doubtful of anyone offering a $3,000 laptop for $450, especially if they are passing it off as a name brand. Knockoffs are very prevalent in China. Hope that helps! Gary

  19. Hi gary

    Nice thread.

    A simple question. Is it safe to pay by alipay on alibaba, If no why is that so and if yes then what are the benefits a buyer may have.

    Regards
    Omee

    1. Hi Omee,

      Thanks for your question. In my view the bigger question is is it safe to work with this supplier? Finding a trustworthy supplier is the critical factor when it comes to sourcing success. Once you do that, then payment safety risks are greatly reduced. Alipay is merely a payment method. Alibaba secure payment (escrow) and PayPal offer some security but you would have to validate that the supplier is at fault and go through a review process in order to get your money back. This can be time consuming. That’s why I say you should make sure to find a trustworthy supplier in the first place. If you’re interested in learning more, I’ve designed a video course on finding a trustworthy supplier. Hope that helps!

      -Gary

  20. We have secured a manufacturer of a couple of different items (bikes) through alibaba. We were sent the invoice and instructed to pay via T/T 100%. Our order total is $4k USD (3 quad cycles and 1 tricycle). These are large items so we have not gone the sample route. We did require a US-based customer referral. We advised the supplier that we planned to pay using the alibaba trade assurance. Now, the supplier wants us to pay the agreed upon order amount but only put the 3 quadicycles on the alibaba invoice and pay seperately for the trike as “shipping” via T/T outside of the alibaba site. First they claimed that they couldn’t send more than one model due to customs & the items having different names. I pressed stating that I thought the customs declarations state what is in the shipment and that all items did not necessarily have to be identical. Next, they didn’t want to use alibaba trade assurance because “the tricycle is too small” and needs to be paid a seperately. We argued that the size of the product should have no bearing on the method of payment. She is now claiming that they they are not the manufacturer of the trike, but are the manufacturer of the quad bikes and that is the reason that they cannot put the trike through alibaba. They advertise both the trike and quads on alibaba. They are a gold alibaba company for 4 years, but this last minute situation has caused us some concern. This feels really wrong to us. I have instructed her to send us the quote through the alibaba system for just 3 similar items as we will decide whether we shall proceed. We will see if the quote looks good and they don’t try pull anything more fishy. Are we right in seeing these as red flags?

    1. Hi Marcie,

      Thanks for your question. Several red flags came up on my radar just now.

      1) First claim to be a manufacturer on Alibaba and then told you later they are not the manufacturer. Definite RED FLAG

      2) Payment terms – I assume this is the first time you’re working with them, right? If so, I definitely would not pay 100% upfront. Very risky! I would negotiate at least 50/50 or 30/70 payment terms to protect yourself and make sure to have the items inspected before shipment in case their’s any quality problems.

      3) This whole runaround with the payment method is a sign of both poor customer service and lack of experience exporting something as simple as 4 items from China to your country. Have you cast a wide net and researched other suppliers (preferably factories) who can manufacture them and have experience exporting to your country?

      I hope that helps.

      Good luck and keep me posted!
      Gary

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