Leveraging Payment Terms to Control Quality

Oct 29, 2023


About The Author

Most of you might be familiar with the traditional payment terms in international trade: advance payment, open account, documentary collections, and letters of credit.

In China and Asia, the most common arrangement I’ve seen is the 30/70 model – 30% upfront upon order placement and 70% upon shipment (usually after inspection).

However, is this structure maximizing your control over quality? Not necessarily.

Drawing from my own experiences in the field, I’ve discovered some alternative terms and strategies that can significantly bolster your quality assurance. Engaging with your supplier on these can truly be a game-changer.

1. Linking Payment to Quality Control Milestones:

Instead of the usual payment upon shipment, consider breaking down that 70% into quality control milestones. For instance:

●     10% after a successful initial sample inspection.

●     20% post a satisfactory mid-production quality check.

●     40% on shipping, after final product inspection and approval.

By distributing the payments in alignment with quality checks, you’re sending a clear message: quality isn’t negotiable.

2. Holding Retention Amounts:

Another strategy I’ve advised clients on is holding a retention amount until the goods are sold to the end customers or after a set period post-shipment, ensuring longer-term quality and functionality. This can be particularly useful for electronics, machinery, or other complex goods.

Now, some suppliers might be hesitant to agree to such terms initially. Here are a few negotiation tips to help you secure this arrangement:

●     Highlight Mutual Benefits: Emphasize that this arrangement ensures both parties are invested in delivering a top-quality product. A satisfied end customer means repeat business for both you and the supplier.

●     Start Small: Propose a smaller retention amount initially and express willingness to review and possibly reduce it as trust builds and consistent quality is delivered.

●     Offer Testimonials: Share examples or testimonials where such arrangements have resulted in better quality products, leading to increased sales and profits for both buyer and supplier.

●     Flexible Timeframes: Instead of setting a long retention period initially, suggest a shorter timeframe and express openness to extending it based on product performance.

Remember, negotiation is about building trust and finding a middle ground. With the right approach, both parties can benefit from a retention amount setup, ensuring long-term quality assurance.

3. Negotiating Quality Rebates:

Include a clause in your contract where, for every ‘x’ amount of defect rate above an agreed percentage, there is a ‘y’ percent rebate on the payment. It quantifies quality in monetary terms, creating a direct financial incentive for suppliers to uphold quality standards.

However, it’s important to note that this approach should be an extension to, not a replacement for, a well-established quality control strategy. A rebate clause can be a powerful tool, but first, you need a strong QC plan that includes:

●     Solid Product Specifications: Detailed, clear, and comprehensive specifications ensure both you and the supplier have a mutual understanding of the expected product outcome.

●     Clear QC Criteria: This involves setting clear and measurable quality benchmarks that products must meet or exceed. Such criteria remove ambiguity from the quality assessment process.

●     Risk-Based Inspection Plan: Recognize that not all products or production runs carry the same level of risk. Design your inspection strategy around the inherent risks associated with different products or batches, allocating resources where they are most needed.

Incorporating quality rebates within your payment terms, coupled with a robust QC strategy, creates a comprehensive approach to ensure the best product outcome. Both methods combined reinforce your commitment to quality and drive home its importance to your suppliers.

4. Using Escrow Services:

Using escrow services, especially for new supplier relationships, can be a game-changer. The payment is held by a third-party (the escrow service) and is only released to the supplier when specific agreed-upon conditions (like quality standards) are met.

For many, especially smaller buyers on platforms like Alibaba, using escrow services has become more common. If you’re starting with a new supplier, this can really help.

5. Revisiting Long-Term Agreements:

For buyers with long-term contracts, consider annual or bi-annual renegotiations of payment terms based on the previous year’s quality performance. If a supplier consistently meets or exceeds quality benchmarks, offering friendlier payment terms can be a good incentive. Conversely, frequent quality issues might mean stricter terms.

More favorable payment terms for your suppliers don’t always imply a direct burden on you. In fact, options like “Order Now, Pay Later” might prove even more advantageous for you.

40Seas (which are also a QCADVISOR partner) offer “Order Now, Pay Later” options, commonly known as Net Terms solutions in international trade. They can handle the upfront payment to your supplier and then set up extended payment terms, like 90 days, at a negotiated rate, allowing you more flexibility in settling your bills.

Here’s why this is a game-changer and directly may impact your quality:

●     Enhanced Cash Flow: Pay Later model, you can keep your working capital in your pocket longer, allowing you to invest more freely in QC processes or other business essentials.

●     Quality Assurance Alignment: An approved credit limit with a provider like 40Seas shows your supplier that you are a verified and credit worthy business. This reduces their risk, focuses them on ensuring a high quality of production, and makes them more open to agreeing to payment and quality milestones.

●     Building Trust: In my experience, trust is a two-way street. When suppliers see that you’ve partnered with a reliable financial institution, it instills confidence, promoting a more collaborative approach to quality control.

From what I’ve observed, companies that use their solutions typically see marked improvements when integrating them into their payment strategies. Here is a link you can use to get to know more about their services if you are interested.

6. Building Relationships:

While leveraging payment terms is a potent strategy, it’s also vital to build and maintain healthy supplier relationships. Open communication, understanding challenges, and providing feedback go a long way. In the Chinese business culture, Guanxi (relationships) can often be as crucial as contracts.

Speaking of building relationships, if you’re venturing to China, why not strengthen our connection in person? If you’d like to meet and say hello, please drop me a line (habib (@) qcadvisor.com). I’d be delighted to catch up!

Follow us on Linkedin for QCADVISOR’s weekly updates.

Read more:

About The Author

Explore further

Join the league of successful brands who never compromise on Quality.


With QCADVISOR, embrace the advanced techniques that set market leaders apart. Are you ready to level up?