Payment terms are the single most underrated lever in a factory negotiation. They don't show up in the unit-price haggle, they don't change the FOB number on the quote sheet, and most first-time buyers accept whatever the factory proposes — which is almost always 30/70 pre-shipment, the structure that shifts the maximum amount of financing and quality risk onto the buyer.
This guide covers the five common payment structures, who each one favors, when to ask for which, and what red flags should make you walk away from a payment ask entirely. Payment terms are also one of the four levers in our negotiation playbook — this guide is the deep dive.
Why payment structure matters more than unit price
A 5% unit-price discount on a $10,000 order saves you $500. Shifting from 30/70 pre-shipment to 20/80 against B/L on that same order saves you ~$150–250 in working-capital cost AND moves 10% of the order value (the difference between 30% and 20% deposit) from "factory's pocket before they ship anything" to "factory's pocket only after they ship something."
The first number is smaller, but the risk-shift is the real prize. If the factory goes bankrupt between deposit and shipment (rare but happens), 30% of order value is gone with no recourse. If the factory delivers junk and refuses rework, you've already paid 70% before you saw the goods.
The structure dictates when money moves and what has to be true for it to move. The five structures below trade these things differently.
The 5 common payment structures
1. 30/70 pre-shipment (the factory default)
How it works: 30% deposit due on PO confirmation. Balance 70% due before the factory ships — typically wired against a "ready-to-ship" notification or a copy of the packing list, BEFORE the goods leave the port.
Who it favors: the factory. They have 100% of order value before the goods physically leave their custody. If you reject the bulk, they sit on goods you've already paid for and you fight for a refund from offshore.
When to use it: as a buyer, almost never on a first order with a new factory. It's the default for a reason — every factory will offer it and most first-time buyers accept it because they don't know better.
When you might accept it: if the factory is referred by someone you trust, if the order is small ($2–5K), or if you've worked with them before with no issues. Some factories with tight cash flow will literally only do 30/70 — in those cases, weigh the relationship value against the risk.
The negotiation move: never accept 30/70 as the first offer. Counter with 20/80 against B/L. Even if you end up at 25/75, you've moved 5% of order value off the pre-shipment pile.
2. 20/80 against B/L (the working-capital lever)
How it works: 20% deposit on PO. Balance 80% due against a copy of the bill of lading (B/L) — the shipping document the carrier issues when the goods are physically loaded onto the vessel. The factory typically holds the original B/L until your wire clears, then releases it to you (or the freight forwarder) so you can take delivery at destination.
Who it favors: balanced. The factory has 20% covering raw materials and partial labor. You only pay the balance once the goods are physically loaded and in transit — which means the factory has actually performed.
When to use it: the standard ask for any second order or any first order above $5K. Most factories will grant this if you ask. The ones that refuse are signaling either cash-flow stress or a low-trust posture.
What to watch for: confirm whether "against B/L" means a B/L COPY (you pay on telex release, then they hand over the original B/L) or the ORIGINAL B/L on cash-against-documents through a bank. Copy is faster (1–2 days); original via bank is safer for very large orders but adds 5–7 days and $50–150 in bank fees.
The working-capital math: on a 60-day cycle, moving from 30/70 pre-shipment to 20/80 against B/L frees up 10% of order value for ~30 days. At a 12% annual cost of capital, that's ~1% of order value back to you. On a $50K order, ~$500 saved per cycle.
3. 15/85 against PSI pass (the quality lever)
How it works: 15% deposit on PO. Balance 85% due ONLY after a pre-shipment inspection (PSI) by a third-party house (SGS, Bureau Veritas, QIMA, Intertek) confirms the bulk passes the agreed AQL standard. If PSI fails, the factory reworks at their cost before you release the balance.
Who it favors: the buyer, strongly. The factory has only 15% covering raw materials — they're financing the labor and overhead themselves until you accept the goods. Quality risk is almost fully on them: bad bulk = no balance payment.
When to use it: only when the factory trusts you AND you trust the factory enough to commit to PSI cost. This is rare for first orders, common for year-two relationships, and standard for buyers placing $100K+ orders. Big retailers (Target, H&M, Uniqlo) run on terms like this or stricter.
When you can't get it: most small/mid factories will refuse 15/85 on a first order because they're carrying real working-capital risk if you walk away. Don't push it on relationships under 6 months old or under $20K — you'll just sour the conversation.
The negotiation move: ask after your first successful order ships. "Now that we've worked together, can we move to 15/85 against PSI for the next run?" Most factories that grant this become long-term partners; the ones that refuse have told you their ceiling.
4. LC at sight (Letter of Credit, the bank-mediated structure)
How it works: your bank issues a letter of credit in the factory's favor for the full order value (or a portion). The bank holds the funds. The factory ships, presents the shipping documents (B/L, commercial invoice, packing list, certificate of origin, sometimes a PSI report) to their bank. The two banks check the documents match the LC terms; if they match, your bank releases the funds. "At sight" means payment happens immediately on document presentation, not on a deferred schedule.
Who it favors: balanced — both parties trust the bank, not each other. The factory knows they'll get paid if they ship and document correctly; you know your money doesn't leave until the goods are documented as in transit.
When to use it:
- First orders with a new factory in a high-risk jurisdiction
- Orders over $30–50K where wire risk is material
- Counterparties you can't easily reach legally if a dispute occurs
- When you want a paper trail of every document for compliance/audit purposes
The cost: $300–1,000 in bank fees (split between buyer and seller depending on the LC terms). LC at sight adds 7–14 days of administrative friction to the cycle. Not worth it for orders under $20K.
What to watch for: the LC must specify the document list precisely. Missing or mismatched documents (wrong shipping date, wrong port, typo in product description) can cause the bank to refuse payment — and the factory will be furious because they've shipped and not been paid. Use a freight forwarder or trade-finance advisor to draft the LC document requirements on your first LC.
5. Open Account / Net 30–60–90 (the trust structure)
How it works: the factory ships, you receive the goods, you pay 30/60/90 days after invoice (or after receipt, depending on the terms). No deposit. No pre-shipment payment. Pure trade credit.
Who it favors: the buyer, completely. The factory is financing your entire order out of their balance sheet for 1–3 months.
When to use it: almost never on a new relationship. Open Account is standard for second-year-plus relationships where you've placed 3+ successful orders, paid on time every time, and the factory views you as a strategic customer. Large retailers get Net 60–90 because they're high-volume repeat buyers; small founders almost never do until they've proven they're sticky.
The negotiation move: don't ask for Open Account in year one. Build to it. After 3–4 successful orders, ask: "Can we move to Net 30 on next order? We can keep a 10% deposit if that helps your cash flow." A hybrid (10% deposit, 90% Net 30) is often easier to land than full Open Account.
Warning: if a factory you don't know offers Open Account on a first order with no track record, that's a red flag. Either they're desperate (financial distress) or they're running a fraud (you'll get junk and they'll vanish). Real factories want at least a deposit on first orders.
Side-by-side comparison
| Structure | Deposit | Balance trigger | Buyer risk | Factory risk | Best for |
|---|---|---|---|---|---|
| 30/70 pre-shipment | 30% | Before ship | High | Low | Tiny orders, trusted referrals |
| 20/80 against B/L | 20% | On B/L copy | Medium | Medium | Standard ask, most first orders |
| 15/85 against PSI | 15% | After PSI pass | Low | High | Year-two relationships, $100K+ orders |
| LC at sight | 0% (LC backed) | On document match | Low | Low | First orders with unknown factories, $30K+ |
| Open Account (Net 30/60/90) | 0% | Days after delivery | Very low | Very high | Year-two-plus, proven track record |
Red flags in a payment ask
A factory's payment ask is a window into how they operate. These signals should make you walk away or restructure the deal entirely:
1. Deposit above 50%. Standard deposits are 15–30%. A 50%+ deposit means the factory either has zero cash flow (can't fund the order themselves) or is testing how desperate you are. Either way, you're financing their business and the asymmetry is dangerous. Counter with "we can do 30% deposit; the balance structure can be flexible" — and if they hold at 50%+, find another factory.
2. Personal wire request to a non-business account. Legitimate factories invoice from a corporate bank account in the factory's registered name. If the wire instructions point to an individual's name, a Hong Kong shell company name that doesn't match the factory letterhead, or a personal account in a different country than the factory — STOP. This is the most common wire fraud pattern in cross-border sourcing. Always verify wire details via a phone call to a known number (not the email signature), and always cross-check the account name against the factory's business registration.
3. Factory refuses ANY escrow or LC option. A legitimate factory will accept LC at sight on large orders even if they grumble about the bank fees. A factory that refuses every form of buyer protection — no LC, no escrow, no PSI hold-back, no third-party inspection — is telling you they expect to deliver something you'd dispute. Walk away.
4. Payment-term flip mid-order. Factory agrees to 20/80 in the quote, then "needs" the balance moved up to "before container leaves port" after you've signed the PO. This is a leverage play once you've committed. Hold the line: the PO terms are the terms. If they refuse to ship under the agreed terms, you escalate or cancel — but you don't renegotiate after the deposit has cleared.
5. Pressure for full payment "to lock in raw materials." Sometimes legitimate (cotton/yarn prices are volatile), often a tactic. If the factory needs more deposit to lock materials, the cleanest structure is: agreed materials cost as a 2nd milestone payment, with receipts. Not a generic "send more money."
Wire fraud prevention — the call-out
Wire fraud is the single biggest dollar-loss risk in cross-border sourcing. The pattern: attacker compromises the factory's email, monitors the relationship, then at the moment of payment sends a "we've changed banks, please wire to this new account" email that looks identical to the legitimate factory's emails. The buyer wires, the factory never receives it, the funds are gone.
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Prevention protocol — every wire, no exceptions: 1. Confirm wire instructions via a phone call to the factory's known number (not a number from the email). Speak to a known person. 2. The account name on the wire instructions MUST match the factory's registered business name. If it doesn't, refuse to send and escalate. 3. First wire to a new factory: send a small test wire ($100–500), confirm receipt by phone, then send the balance. 4. Never wire to a personal account, even if the factory "explains" it. Period. 5. Save the factory's confirmed wire instructions in a secure location and re-check only via phone if they ever change.
Most wire fraud succeeds because the buyer is in a hurry. Build the verification step into your payment process and the fraud risk drops to near zero.
How payment terms interact with Incoterms
Payment terms answer "when does money move?" Incoterms answer "where does responsibility transfer?" They're independent levers but they interact:
- FOB + 20/80 against B/L: standard. B/L is generated when goods load onto vessel; payment triggers at the same point responsibility transfers. Clean.
- EXW + 20/80 against B/L: awkward. EXW transfers responsibility at the factory door, before the B/L exists. Either use 30/70 pre-shipment with EXW or shift the Incoterm to FOB.
- DDP + 15/85 against PSI: rare but powerful for buyers. Factory carries all transport AND quality risk until the goods clear destination customs. Only available from very confident factories.
If you're not yet fluent in Incoterms, read our Incoterms guide first — payment terms are much easier to negotiate when you can speak Incoterms back.
How to actually deploy this in a quote thread
First order with a new factory ($5–20K range): ask for 20/80 against B/L copy. If they refuse, accept 30/70 BUT add a PSI requirement with balance held until pass. You've added quality protection even if you couldn't move the working-capital lever.
First order, larger ($20K+): push for LC at sight. The bank fees are noise on a large order and you get the document protection. Factory grumbles but accepts because the LC guarantees their payment.
Second order with a factory that performed well: ask for 15/85 against PSI pass. Reference the first order. Most factories grant this to lock in the repeat business.
Year-two relationship, 4+ successful orders: ask for Net 30 with 10% deposit. You're now a strategic customer; the factory wants to keep you.
Always: when you confirm any payment structure, get it in writing in the PO (not just the quote sheet), specify the exact document that triggers the balance payment, and specify the bank account in the PO so any later "we changed banks" email is an obvious red flag.
For the broader checklist of what to lock down before your first order ships, see our first production checklist — payment terms are step 1 but there are 8 more.
How Frenzee handles payment terms
Every RFQ routed through Frenzee includes a payment-terms ask as part of the standard request format — typically 20/80 against B/L for first orders, with an option to upgrade to LC at sight for larger commitments. The factory either grants the standard terms or counter-offers, and you see the structures side-by-side across all matched factories. The ones that hold the line at 30/70 pre-shipment for a $30K first order self-identify; the ones that grant 20/80 without flinching tell you something about how they value the relationship.
Frenzee also pre-fills the wire-verification checklist when you confirm a PO — including the account-name match requirement and the test-wire option — so the fraud-prevention protocol becomes the default, not an optional extra.