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PayPal payments & general payment terms

Posted: September 16, 2015

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.

4. PayPal
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.

5. Escrow
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: http://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.

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