Quite often I get asked what the reasons could be that his = supplier=20 doesn=E2=80=99t accept PayPal? Well it=E2=80=99s not because he = wants to rip you off and=20 wants to avoid PayPal=E2=80=99s buyer protection.
No, it=E2=80=99s because PayPal payment is not really a widely = accepted payment term=20 within the industry plus the fee=E2=80=99s are really high, especially = on the sellers=20 side.
Many factory=E2=80=99s won=E2=80=99t accept PayPal payments mostly = because of the fee=E2=80=99s and=20 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=20 the supplier accepts PayPal because of the buyer protection. That = information is=20 partly misleading you and I want to explain why.
Yes, it does protect the buyer in a certain way but most factories = that work=20 with the retail or eCommerce business work with wire transfers and do = not accept=20 PayPal.
Having said all that of course you can try to get the supplier to = accept=20 PayPal but do not dismiss a supplier because he doesn=E2=80=99t agree to = PayPal=20 payments.
One reason why most suppliers also do not accept PayPal payments is =
because=20
of the high fees for the seller.
Most buyers don=E2=80=99t even know =
there are so=20
many fees and they think the seller is trying to scam them when they ask =
for=20
additional fees on top.
Here is a recent example of a PayPal transaction I have received from = a=20 buyer. Being a manufacturer and supplier myself I accept PayPal for some = of my=20 orders because I know it is convenient for the buyer but if the amount = gets=20 large I don=E2=80=99t.
In this particular case the order amount is 500US$, PayPal deducts = 4.4%=20 immediately because most people choose =E2=80=9C I am paying for goods = & services=E2=80=9D=20 which is technically correct but that means the seller has to bear all = the=20 fees.
That brings us to 477.7USD. Then it gets interesting. PayPal does not = allow=20 the user to deposit these 477.7USD to the users USD account even if he = has a USD=20 account.
For example, I have 2 bank accounts in Hong Kong and both of them = have USD=20 deposit accounts. However PayPal doesn=E2=80=99t transfer the 477.7US$ = to my bank=20 account.
No, they force me to use their internal exchange rate to exchange = into Hong=20 Kong Dollars, even I tell them that I have a USD account (same thing = happens in=20 China with Chinese Yuan or RMB).
The official exchange rate as of today is 7.75HKD to the USD. = PayPal=E2=80=99s=20 exchange rate is 7.5HKD to the USD. Meaning I lose another 15.38$ in = exchange=20 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=20 as the supplier either. Thats why when someone insists on PayPal payment = I=20 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=20
PayPal would be 160US$ while a simple bank wire transfer would =
cost=20
15$. Wouldn=E2=80=99t you like to save that kind of =
money?
The most common payment term accepted is T/T payment or wire = transfers and=20 thats why suppliers are most likely telling you that this is the only = form of=20 payment they accept.
This is not a red flag for you, it=E2=80=99s actually a sign they are = serious and not=20 a mom & pop shop who accept PayPal. All the retailers worldwide work = with=20 this payment term.
Now lets take a look at some of the other payment terms available and = if you=20 can protect yourself with each payment term somehow. They are mentioned = in my=20 book but I will go into more detail here:
There are several common methods of payment, and each have their pros =
and=20
cons for both the buyer and the seller.
The longer you work with a =
supplier=20
the easier it will be to deal with payments. In the beginnings you will =
most=20
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=20 paid 100% on delivery (T/T). The supplier can always say no, but if he = agrees=20 this gives you financial liquidity.
Many retailers actually work on a T/T basis 60-90 days AFTER = shipment,=20 allowing them to sell goods already while they haven=E2=80=99t even paid = for them yet.=20 That is the ideal situation for you as a buyer but not many suppliers = will agree=20 to this term.
Let=E2=80=99s take a look at the most common payment options and the = associated risk=20 level to you as the buyer:
1. TT (Telegraphic Bank Transfer or wire transfer)
Risk =
Level=20
For Buyer: Medium Risk
With a bank transfer, the supplier will =
receive=20
payment before production starts. Very important: if you agree to this =
payment,=20
NEVER pay more than 30% upfront. 70% will be paid upon inspection and =
shipment=20
release. This payment method bears a medium level of risk to the buyer =
and=20
generally is not recommended when dealing with a completely unknown =
supplier.=20
There is little that can be done to get your money back if something =
goes=20
wrong.
You can request a re-call of the funds trough your bank but the other = side=20 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=20 having an inspection and releasing the rest of the money ONLY after the = order is=20 to your satisfaction (passed shipment inspection).
If you can=E2=80=99t afford or do not want to have an inspection (for = example because=20 the total order value is so low it wouldn=E2=80=99t be economical) then = I recommend to=20 have the supplier self-inspect and send you an internal inspection = report.
This report should include pictures during and after production of = the=20 product, packaging,labels, cartons etc. that shows your order is made = according=20 to your requirements.
Usually every supplier will agree to give you an internal inspection = report.=20 If not, thats a red flag. So it is important you clarify this part = BEFORE=20 placing the the order and sending money.
2. Letter of Credit (L/C)
Risk Level For Buyer: Very=20
Safe
A letter of credit is very safe for both parties. However a =
letter=20
of credit is rather complicated to issue through a bank, costs quite a =
lot of=20
money, and is generally only recommended for larger purchases ($50,000 =
and=20
above).
What essentially happens is that your bank issues a letter of credit = to the=20 suppliers bank and the supplier has proof that you have enough financial = capital=20 to pay him eventually. Once the order is produced the supplier will send = the=20 requested shipment documents to his bank and his bank in turn will send = all the=20 documents to your bank upon which your bank releases the cash to the = suppliers=20 bank. The good thing for you as a buyer here is that you can at any = point=20 decline to release the money if your order was not produced according to = your=20 requirements (remember to have an inspection) and you can ask the = supplier to=20 re-work the order if there was any problem. Otherwise he won=E2=80=99t = get his=20 money.
L/C payments are widely accepted especially for very large purchases = because=20 the supplier can get a large credit from his bank to purchase raw = material to=20 get production going. The downside is that L/C=E2=80=99s usually have = fees of 500US$ or=20 more.
3. Western Union
Risk Level For Buyer: Very =
Risky
=20
Western Union from my point of view should ONLY be used when dealing =
with people=20
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=20 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=20
popular payment method for buyers as it presents a much lower risk, ease =
of use,=20
and generally pretty good buyer protection. Although it=E2=80=99s a =
popular option with=20
buyers, it=E2=80=99s less popular with suppliers due to difficulties in =
withdrawing=20
money, high tax rates, and potential charge backs from less than honest =
buyers.=20
PayPal is widely accepted on eCommerce sites like DHgate.com or for =
sample=20
payments. Other than that, the above applies.
5. Escrow
Risk Level For Buyer: Very Safe
When =
using an=20
escrow service, the buyer=E2=80=99s money is held by a third party and =
is only paid to=20
the supplier after the buyer confirms satisfactory delivery of their =
order.
Escrow is a fairly safe payment method for buying and selling online = because=20 it protects both the buyer and supplier. Escrow fees range from 4-11% so = this=20 can be rather expensive for both parties.
Generally, when you are just starting out and ordering small =
quantities like=20
20-50 pieces, you=E2=80=99ll probably want to look for or negotiate with =
suppliers to=20
either accept PayPal or some type of escrow service to give you the =
highest=20
level of protection.
When you have an established relationship with =
a=20
supplier you should aim at T/T or L/C payment possibly with terms that =
benefit=20
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=20
supplier gives you. Does the name or the address of the beneficiary =
match up=20
with the suppliers=E2=80=99s name? At least partly? If not be very =
careful.
Perhaps your contact is even asking you to wire money to his = =E2=80=9Cboss=E2=80=9D or his=20 =E2=80=9Cpersonal account=E2=80=9D because of internal finance issues? = DO NOT believe that for a=20 moment.
If the information doesn=E2=80=99t match up ask why and if there is = no good=20 explanation, walk away and look for a new supplier.
Happy sourcing guys!