by Manuel Becvar
Quite often I get asked what the reasons could be that his supplier doesn't accept PayPal? Well it's not because he wants to rip you off and wants to avoid PayPal's buyer protection.
No, it's because PayPal payment is not really a widely accepted payment term within the industry plus the fee's are really high, especially on the sellers side.
Many factory’s won't accept PayPal payments mostly because of the fee's and because it is difficult to withdraw money in China from PayPal.
I often hear on forums or podcasts how they stress to NOT place orders unless the supplier accepts PayPal because of the buyer protection. That information is partly misleading you and I want to explain why.
Yes, it does protect the buyer in a certain way but most factories that work with the retail or eCommerce business work with wire transfers and do not accept PayPal.
Having said all that of course you can try to get the supplier to accept PayPal but do not dismiss a supplier because he doesn’t agree to PayPal payments.
One reason why most suppliers also do not accept PayPal payments is because of the high fees for the seller.
Most buyers don’t even know there are so many fees and they think the seller is trying to scam them when they ask for additional fees on top.
Here is a recent example of a PayPal transaction I have received from a buyer. Being a manufacturer and supplier myself I accept PayPal for some of my orders because I know it is convenient for the buyer but if the amount gets large I don’t.
In this particular case the order amount is 500US$, PayPal deducts 4.4% immediately because most people choose “ I am paying for goods & services” which is technically correct but that means the seller has to bear all the fees.
That brings us to 477.7USD. Then it gets interesting. PayPal does not allow the user to deposit these 477.7USD to the users USD account even if he has a USD account.
For example, I have 2 bank accounts in Hong Kong and both of them have USD deposit accounts. However PayPal doesn’t transfer the 477.7US$ to my bank account.
No, they force me to use their internal exchange rate to exchange into Hong Kong Dollars, even I tell them that I have a USD account (same thing happens in China with Chinese Yuan or RMB).
The official exchange rate as of today is 7.75HKD to the USD. PayPal’s exchange rate is 7.5HKD to the USD. Meaning I lose another 15.38$ in exchange fees for a total of 37.68US$ in fees (8%).
So essentially I get 462US$ paid to my bank account which is not fair for me as the supplier either. Thats why when someone insists on PayPal payment I usually add 8% to the total amount and so do all the other suppliers.
Now imagine the amounts get to 2000$ or above. The fees on 2000$ with PayPal would be 160US$ while a simple bank wire transfer would cost 15$. Wouldn’t you like to save that kind of money?
The most common payment term accepted is T/T payment or wire transfers and thats why suppliers are most likely telling you that this is the only form of payment they accept.
This is not a red flag for you, it’s actually a sign they are serious and not a mom & pop shop who accept PayPal. All the retailers worldwide work with this payment term.
Now lets take a look at some of the other payment terms available and if you can protect yourself with each payment term somehow. They are mentioned in my book but I will go into more detail here:
There are several common methods of payment, and each have their pros and cons for both the buyer and the seller.
The longer you work with a supplier the easier it will be to deal with payments. In the beginnings you will most likely (and should) work with a 30% deposit or down payment on your order.
The rest is paid after or immediately before shipment. If you have an established business relationship you could ask that the next order should be paid 100% on delivery (T/T). The supplier can always say no, but if he agrees this gives you financial liquidity.
Many retailers actually work on a T/T basis 60-90 days AFTER shipment, allowing them to sell goods already while they haven’t even paid for them yet. That is the ideal situation for you as a buyer but not many suppliers will agree to this term.
Let’s take a look at the most common payment options and the associated risk level to you as the buyer:
1. TT (Telegraphic Bank Transfer or wire transfer)
Risk Level For Buyer: Medium Risk
With a bank transfer, the supplier will receive payment before production starts. Very important: if you agree to this payment, NEVER pay more than 30% upfront. 70% will be paid upon inspection and shipment release. This payment method bears a medium level of risk to the buyer and generally is not recommended when dealing with a completely unknown supplier. There is little that can be done to get your money back if something goes wrong.
You can request a re-call of the funds trough your bank but the other side still has to sign and agree the re-call when they are notified of it.
However you can protect at least the initial 30% of the money (deposit) by having an inspection and releasing the rest of the money ONLY after the order is to your satisfaction (passed shipment inspection).
If you can’t afford or do not want to have an inspection (for example because the total order value is so low it wouldn’t be economical) then I recommend to have the supplier self-inspect and send you an internal inspection report.
This report should include pictures during and after production of the product, packaging,labels, cartons etc. that shows your order is made according to your requirements.
Usually every supplier will agree to give you an internal inspection report. If not, thats a red flag. So it is important you clarify this part BEFORE placing the the order and sending money.
2. Letter of Credit (L/C)
Risk Level For Buyer: Very Safe
A letter of credit is very safe for both parties. However a letter of credit is rather complicated to issue through a bank, costs quite a lot of money, and is generally only recommended for larger purchases ($50,000 and above).
What essentially happens is that your bank issues a letter of credit to the suppliers bank and the supplier has proof that you have enough financial capital to pay him eventually. Once the order is produced the supplier will send the requested shipment documents to his bank and his bank in turn will send all the documents to your bank upon which your bank releases the cash to the suppliers bank. The good thing for you as a buyer here is that you can at any point decline to release the money if your order was not produced according to your requirements (remember to have an inspection) and you can ask the supplier to re-work the order if there was any problem. Otherwise he won’t get his money.
L/C payments are widely accepted especially for very large purchases because the supplier can get a large credit from his bank to purchase raw material to get production going. The downside is that L/C’s usually have fees of 500US$ or more.
3. Western Union
Risk Level For Buyer: Very Risky
Western Union from my point of view should ONLY be used when dealing with people you know very well. There is no guarantee if something goes wrong.
Anyone can go and pick up the money you send to this certain person. There is no insurance, your money can be gone and there is nothing you can do.
Risk Level For Buyer: Fairly Safe
PayPal is a popular payment method for buyers as it presents a much lower risk, ease of use, and generally pretty good buyer protection. Although it’s a popular option with buyers, it’s less popular with suppliers due to difficulties in withdrawing money, high tax rates, and potential charge backs from less than honest buyers. PayPal is widely accepted on eCommerce sites like DHgate.com or for sample payments. Other than that, the above applies.
Risk Level For Buyer: Very Safe
When using an escrow service, the buyer’s money is held by a third party and is only paid to the supplier after the buyer confirms satisfactory delivery of their order.
Escrow is a fairly safe payment method for buying and selling online because it protects both the buyer and supplier. Escrow fees range from 4-11% so this can be rather expensive for both parties.
Generally, when you are just starting out and ordering small quantities like 20-50 pieces, you’ll probably want to look for or negotiate with suppliers to either accept PayPal or some type of escrow service to give you the highest level of protection.
When you have an established relationship with a supplier you should aim at T/T or L/C payment possibly with terms that benefit you e.g. T/T or L/C 60 days after shipment as mentioned above.
Bank account information
Pay attention to the bank details the supplier gives you. Does the name or the address of the beneficiary match up with the suppliers’s name? At least partly? If not be very careful.
Perhaps your contact is even asking you to wire money to his “boss” or his “personal account” because of internal finance issues? DO NOT believe that for a moment.
If the information doesn’t match up ask why and if there is no good explanation, walk away and look for a new supplier.
Happy sourcing guys!
Manuel Becvar is the founder of "Mandarin-Gear Ltd Hong Kong" a sourcing company based in Hong Kong. Previous to founding his own company Manuel had been working with large retailers as a buyer in Hong Kong for over 10 years. Apart from Mandarin-Gear, Manuel runs a blog: www.importdojo.com that focuses on helping buyers to import from China; especially for Amazon FBA buyers. He has also written 4 best sellers books about importing from China that are available on Amazon as well as in his online course on www.importdojo.com.