Buying Ferroalloy from China: How to Negotiate T/T and L/C Payment Terms

Most buyers treat payment terms as the last field to fill in once the deal is agreed. In practice, payment terms decide whether you still have any leverage on the day something goes wrong. The moment you pay should be a moment when something verifiable has already happened. Paying in full before the cargo is loaded means every quality clause that follows rests on the other party’s goodwill.

Work through the seven steps below and you will be able to judge whether T/T or L/C fits your order, given its value, the stage of the relationship and where the risk actually sits; know how to argue deposit percentage and the trigger for the balance; read the six L/C fields that cause most of the trouble; spot a soft clause; and align the payment trigger with the point where risk transfers, so there is no window where the money has gone but the goods are not yet yours.

Step 1 · Set out the order structure first

Payment terms do not start from “which method is safer”. They start from “what does this order actually look like”. Four things go on the table first:

The fourth one is routinely underestimated. From order confirmation to loading is typically several weeks for ferroalloy, and shipping adds more. Capital sits in the cargo throughout, and that cost belongs in the calculation — which is one reason deposit-plus-balance structures are more widely accepted than full prepayment.

Understanding what the deposit is actually for makes the conversation much easier. A supplier asking for a deposit is not being difficult: that money buys silica, manganese ore or coke, or fixes the month’s price. When raw material prices are moving, that need is real.

Step 2 · Work out where the risk sits

Payment terms are, at bottom, an answer to three questions. Put all three on the table before negotiating:

Lay those three out and it becomes clear that no payment method is “safe”. Every method moves these three risks between buyer and seller; none of them removes them. Full prepayment in advance puts all three on the buyer. Open account puts all three on the seller. Everything in between is a different split.

So the right question in negotiation is not “can this be safer”. It is “on this order, who should carry each of these three”.

Step 3 · Choose among the five methods in use

Five methods account for most ferroalloy trade. The full picture first, then how to choose:

D/P (documents against payment) is still used in some markets, but appears far less often in ferroalloy than the five above.

How it works out in practice: samples and small orders mostly go on full prepayment; a standard first order is usually deposit plus balance against bill of lading copy; once the value climbs, buyers move to sight L/C. That distribution is not accidental — it tracks verification cost. On a small order, the time and bank fees spent verifying exceed the risk itself. On a large one, verification is worth paying for.

Step 4 · Negotiating T/T: deposit percentage and balance trigger

T/T has only two variables, and each has a right way to be set.

Setting the deposit. 30% is common; bespoke grades or orders requiring dedicated raw material may go to 50%. The test is direct:

The deposit should not exceed what you are willing to lose in the worst case. If the supplier takes the deposit and does not ship, can you absorb that number?

Anything above 50% needs a stated reason (dedicated raw material, custom chemistry, a long price-lock period) and must be paired with the deposit-refund clause in Step 7.

Setting the balance trigger. The most common is payment against bill of lading copy. The logic: the cargo is on board, so risk is broadly under control.

The premise that has to be understood: a B/L copy can be forged. Paying the balance on a scanned document alone puts the risk on document authenticity. So paying against B/L copy needs three things alongside it:

Those three cost far less than the balance itself, and they turn “payment against B/L copy” from an act of trust into an act of verification.

Step 5 · Negotiating L/C: six fields to check

The value of a letter of credit is that the bank looks at documents, not goods. If the documents comply, payment follows — which gives both sides a mechanism that does not depend on trust. But precisely because only documents are examined, one field written wrong jams the whole mechanism.

Confirm these six fields one by one when issuing:

Soft clauses deserve the most attention here. A soft clause is a condition the beneficiary (the supplier) cannot control on its own. In effect it turns bank credit into something that can be blocked at will.

The usual ones:

• Requiring an inspection certificate “issued by the buyer’s representative”
• Requiring a shipping advice “confirmed by the buyer”
• Inspection certificate to be signed by a signatory authorised by the applicant, with the specimen signature confirmed through the issuing bank
• Bill of lading made out to the order of the issuing bank, requiring the bank’s endorsement

From the buyer’s side, adding a soft clause looks like protection. In practice the supplier usually refuses the credit outright or asks for an amendment — amendments cost money and time, and shipment slips. More importantly, if a dispute does arise and the bank rejects documents on a discrepancy, the deal falls back to “the two of you sort it out”, which is exactly what the credit was meant to avoid.

The workable substitute: replace “certificate issued by the buyer” with a certificate from a third-party inspection body both sides accept (SGS, BV or equivalent). This holds up for both parties — the buyer gets independent verification, the seller gets a document they can actually produce.

Step 6 · Align the payment trigger with the risk transfer point

This step gets skipped more than any other, and it is what determines how wide the window is where your money has gone but the cargo is not yet yours.

The trade term (Incoterms 2020) sets the point at which risk passes from seller to buyer. The payment clause sets the conditions under which money moves. The two have to line up:

The test to apply: at the moment you pay, something you can verify should already have happened — cargo loaded, third-party inspection issued, bill of lading released. If none of those has happened yet, you are in a position with promises but no evidence.

The FOB/CIF difference is worth noting. Under FOB the buyer nominates the forwarder and gets bill of lading information earlier. Under CIF the seller books the vessel, so the buyer has to ask specifically for the B/L copy, loading photographs and container and seal numbers — otherwise verification happens a step too late.

Step 7 · Write the “if something goes wrong” part into the payment clause

The part most often missing entirely from payment terms is what happens to the money when things go wrong. Three provisions are worth writing in:

Late delivery. If the shipment date is missed by X days, the buyer may choose to wait or cancel; if cancelled, how the deposit is refunded and within how many days. Without this, a late supplier can simply be chased.

Quality failure. Which result governs (pre-shipment third-party inspection, or the retain sample sealed jointly at loading), and whether the remedy is replacement, price reduction or refund. The wording has to line up with the claims period in the contract — the starting point of the period and the payment trigger must not contradict each other.

Deposit refund conditions. The most frequently missing and the most important: if the supplier cannot ship on time, under what conditions and within how many days is the deposit returned. Write this in and the deposit stops being money held at the other party’s discretion and becomes prepayment with an exit.

One more, from the buyer’s side. Some contracts carry a clause saying that if raw material costs move by more than X%, the two sides reopen the price. That is not unreasonable in itself — silica, manganese ore and coke do move. What needs guarding against is abuse, so tie the trigger to a stated reference (a published index, for example) rather than leaving it to one party’s assertion.

Decision tree: which method for this order

Walk these in order; stop where you land.

The whole thing comes down to one sentence: the larger the value and the newer the relationship, the more you need the combination of independent verification plus payment deferred. On a small order, the time and fees spent verifying can cost more than the risk itself.

Ten common traps

FAQ

The supplier insists on full prepayment. What do I do?

First work out why: the value is too small for a credit, or production genuinely needs funding. Small value is acceptable. At larger value, ask for alternatives — part of the balance payable after loading, a sight L/C, or at minimum pre-shipment third-party inspection. A supplier who refuses every alternative without giving a reason is itself a signal.

How much does an L/C cost, roughly, and is it worth it?

It varies considerably between banks: usually a percentage of the credit amount, plus SWIFT charges and any amendment fees — several hundred US dollars is a common starting point. The test is whether that cost is proportionate to the exposure you are carrying. On a small order, issuance charges take a visibly larger share of the goods value, and deposit plus balance usually works out better.

Can I use PayPal, a card, or a platform escrow?

For small samples, yes. Ferroalloy orders are usually measured in tens of thousands of US dollars, where the fee rates and limits of those instruments do not fit — and dispute handling on consumer payment rails is not clearer than under a credit at this size.

Can the deposit go to a Hong Kong account or a third-party account?

A receiving account whose name differs from the contracting entity is a risk signal. If the explanation is that it is another entity within the group, have that entity named in the contract, or state the collection arrangement explicitly. If you need to recover funds at any point, that step matters a great deal.

What we do

Henan Longchuang Metallurgical Materials supplies steel plants and foundries with RE Mg ferrosilicon (nodularizer), inoculants, alloy cored wire, ferrosilicon, and manganese and chromium series alloys — over 20 product lines.

On payment and trade terms, how we work:

• Payment terms— first order 【deposit percentage + balance trigger, fill in as applicable】; after a stable track record, 【open account days】 is open to discussion; 【L/C at sight / usance, fill in as applicable】 accepted
• Account and currency— payment to the company’s corporate account, matching the contracting entity; currencies accepted: 【fill in】
• Pre-shipment verification— third-party inspectors nominated by the buyer (SGS, BV or equivalent) are welcome on site; loading photographs, container and seal numbers provided
• Shipping documents— packing list, test certificate matched to heat number, and bill of lading details supplied promptly for cross-checking
• Lead time and refund— delivery time stated in the order; where delay is on our side, 【deposit refund terms, fill in as applicable】
• Quotation— reference grade, adjustment rate and settlement weight are written on the quotation, not left until results are out

Send us your target composition, monthly volume and destination port — quotation and available tonnage within 【12 hours】.