Letter of Credit, Escrow or 30/70: How to Protect a Prepayment at Different Order Sizes
Letter of credit, escrow or 30/70 when sourcing from China: what to choose for $5,000, $30,000 and $150,000 orders, what it costs and where each one fails.
A prepayment is the riskiest point of any sourcing deal in China: before shipment the factory already has your money, and you only have promises. There are three working ways to protect it: a letter of credit (L/C), escrow through a platform or bank, and the classic 30/70 scheme with inspection. The question is not which is “best”, but which is justified for your amount and your factory. Below: a comparison, budget guidelines and the places where each scheme breaks.
Quick terms: a letter of credit is a bank’s undertaking to pay the seller against a set of documents that match the L/C terms; escrow means a third party holds the funds until conditions are met; 30/70 is a deposit for production and the balance after the goods are checked.
Three schemes compared
| Parameter | 30/70 + inspection | Letter of credit (L/C) | Escrow / Trade Assurance |
|---|---|---|---|
| Suits order size | small to mid | large one-off shipments | small orders, samples |
| Start-up speed | days | weeks to agree and open | fast |
| Costs | bank transfer | bank fees, amendment charges | platform/bank fee |
| What it protects | balance tied to quality | payment only against documents | funds until confirmation |
| What it does NOT protect | the 30% deposit is at risk | physical quality of goods | a large batch outside platform rules |
| Key condition | contract + AQL inspection | accuracy of every document | claim filed on time |
What to choose at different order sizes
Up to $5,000. Platform escrow, or a paid sample from a clear supplier. Complex schemes cost more than the protection itself.
$5,000–$50,000. The standard is a 30% deposit against the proforma and 70% after the inspection report. The basis is a contract with Incoterms and a check of the factory’s details against its business licence (how to pay a Chinese supplier safely).
Over $50,000 with a new factory. A letter of credit or a reinforced 30/70 fits here: the balance is paid only after inspection by an independent party and against original documents. For repeat orders with a proven supplier, an L/C is usually overkill.
These thresholds are indicative: what matters is not only the amount but its share of your annual budget and how long you have worked with the factory.
Where a letter of credit breaks
The main L/C risk is not fraud but a discrepancy: any document that fails to match the terms. The bank may reject payment even over a small mismatch: a different spelling of the company name, a different amount, an expired shipment date. Check the whole document chain: proforma and commercial invoice, packing list and bill of lading.
The second risk: the bank checks paper, not goods. To compensate, include an independent inspection certificate in the terms (see quality control in China).
Where escrow breaks
- Platform rules limit the claim period — miss the window and the money goes to the seller.
- Protection covers the terms written into the platform order. Anything agreed in a messenger may be ignored by the arbiter.
- A large production order such as furniture or tile is awkward under escrow: the platform does not check quality against your specification.
Where 30/70 breaks
The scheme works only if the balance is really tied to an event. A common mistake is “70% before shipment” without inspection: you pay against photos the factory itself sends. The right way: the balance after an independent AQL inspection report and before the original bill of lading is released. The second failure is paying to an account that differs from the details in the contract.
Mini-case: choosing the scheme right
A hotel buyer in Phuket placed a large furniture and finishing order with a factory new to them. A letter of credit looked excessive in terms of time, and nobody wanted full prepayment. They chose 30/70: deposit after checking the licence and bank details, a golden sample before the series, inspection before loading. On inspection a batch of fronts came out with dimensional deviations — the balance was held until they were remade. Had the 70% gone in advance, there would have been no leverage.
Checklist before the first payment
- Details in the proforma, contract and licence match.
- Incoterms are defined with a named port.
- The balance is tied to inspection, not a promise.
- Bank detail changes are confirmed through a separate channel.
- It is clear who files a claim and by when.
Payments under Dream View control
Dream View works as a sourcing agent with a fixed 10% commission on the order value (minimum order from $100,000 per year). We vet the supplier, fix the payment scheme in the contract, split payment into stages and tie the balance to pre-shipment inspection.
Preparing to pay and unsure which scheme fits your amount? Write to orders@dreamviewchina.com, Telegram t.me/dreamviewchina or call +66 80 942 2230 — we will review the terms and suggest a payment structure, free of charge.
Frequently asked questions
Which is better when buying from China — a letter of credit or 30/70 payment?
It depends on the order size and how well you know the factory. For small and mid-size orders with a vetted factory, the standard is 30% deposit and 70% after pre-shipment inspection: fast and with no bank fees. A letter of credit (L/C) makes sense for large one-off shipments with a new factory: the bank pays only against documents that match the terms, but the process is costlier and stricter.
What is escrow when paying a supplier in China?
A scheme where a third party — a platform or a bank — holds the money and releases it to the seller only once conditions are met. Alibaba Trade Assurance is an example. It suits small orders and samples, but it protects only within platform rules and does not replace a contract and inspection on a large batch.
How much does opening a letter of credit cost?
Banks charge for opening, for document examination and for each amendment; rates depend on the bank and country, so check the tariff in advance. A separate cost is fixing documents: under UCP 600 a bank may reject any discrepancy, and the factory may charge to reissue papers.
Why doesn't a letter of credit protect against poor quality?
The bank checks documents, not goods. If the paperwork matches, payment goes through even if the cartons contain defects. Include an independent inspection certificate in the L/C terms and check physical quality separately — by AQL before shipment.
Can I pay 100% upfront to a Chinese factory?
Only on very small orders and with a long-standing partner. On a production order, 100% upfront removes your leverage: the factory has to do nothing more to get the balance. Split payment into stages and tie the balance to the inspection result.
Who gets the money in escrow if the cargo never arrives?
The platform's arbitration or your bank agreement decides, and claim deadlines are limited. Keep correspondence, photos and the inspection report, and file the claim within the period set in the rules.
Sources
- ICC — Incoterms® 2020 rules(iccwbo.org)