Understanding payment terms and Incoterms is crucial for importers because these two sets of rules determine when you pay and who is responsible for your cargo at each step of the journey. Having clarity on both reduces disputes and surprises.

Common Payment Terms

A typical arrangement for consumer goods exported from China is T/T (Telegraphic Transfer) with a deposit. The buyer pays a percentage up front—often 30%—and the supplier uses that money to buy materials and start production. The balance is due when the order is finished, usually after the buyer or a third-party inspector has checked quality. This method balances risk: the supplier gets some cash flow and the buyer retains leverage until the goods are ready.

For larger or higher-risk orders, buyers sometimes use a letter of credit (LC). An LC is a promise from the buyer’s bank to pay the supplier once specific documents, such as a clean bill of lading, are presented. It protects the buyer because payment happens only if the supplier ships on time and produces the correct documents. It protects the supplier because the buyer’s bank stands behind the payment. LCs cost more to set up and are best for orders over roughly $50,000 or when the parties don’t know each other.

Open account terms—where the supplier ships and the buyer pays later—are rare with new suppliers. They are offered only to long-term partners or high-volume clients because the supplier takes on all the risk. Some smaller orders on online platforms use escrow or trade assurance services. An escrow account holds the buyer’s money and releases it to the supplier only after the goods are delivered or the buyer confirms satisfaction. This method gives both parties some protection with minimal administrative hassle.

What are Incoterms?

Incoterms are standardized shipping terms published by the International Chamber of Commerce. They define which party handles costs, risk, and paperwork at each stage of transport. Four commonly used terms when sourcing from China are EXW, FOB, CIF and DDP.

EXW (Ex Works) means the seller makes the goods available at their factory or warehouse. The buyer is responsible for everything after that point: inland transport to the port, export clearance, freight, insurance, import formalities and delivery to their door. This term gives the buyer the most control but also the most responsibility and risk.

FOB (Free on Board) is widely used for sea freight. The supplier delivers goods to the named port, clears export customs and loads the cargo onto the vessel. Risk transfers to the buyer once the goods are on board. The buyer arranges and pays for the ocean freight, insurance, and import clearance. FOB is a good balance because suppliers are familiar with export procedures and buyers handle the major freight leg.

CIF (Cost, Insurance and Freight) goes a step further: the supplier arranges and pays for the ocean freight and minimal insurance to the destination port. Risk, however, still transfers when the goods cross the ship’s rail at the origin port. CIF gives buyers a single price that includes shipping to their local port but they remain responsible for import duties and inland transport.

DDP (Delivered Duty Paid) is the most comprehensive term. The supplier is responsible for shipping, export and import clearance, duties, taxes, and delivery to the buyer’s door. It is appealing because it appears to eliminate headaches, but it is rarely used for larger orders. Many suppliers are not set up to handle foreign customs compliance and would need to estimate duties that vary by country. Always double-check that a supplier offering DDP can do so legally; under-declared values to reduce duty are illegal and risky.

Choosing the right combination

Deciding which combination of payment and shipping terms to use depends on your experience and resources. If you have a freight forwarder and customs broker, FOB is a sensible choice for most ocean shipments. If you are new or want a simple price that covers freight, CIF might be acceptable, although you should compare the supplier’s freight quote to your own forwarder. Use DDP only for small parcels or with a logistics partner you trust.

Whichever terms you agree on, spell them out clearly in your purchase order: for example, “Price FOB Guangzhou, 30% deposit by T/T, 70% balance after inspection.” Never pay 100% upfront for a production order; you lose leverage if there is a quality problem. With proper payment terms and the right Incoterm, your China shipments will go smoothly and you’ll avoid disputes and hidden costs.