Deposit structures that protect buyers and factories

Deposit structures look like a finance detail, but they are one of the most common points of failure in a first China order. The pattern we recommend is 50% deposit on all first time orders, shifting to a 30, 40, 30 split on repeat orders with a qualified factory. Here is why.

Why 50% on first orders

A first time buyer is asking a factory to commit raw materials, line capacity, and engineering time before any commercial trust is established. A 50% deposit covers the factory's raw material exposure and signals serious commercial intent. Anything less and the factory will either inflate unit price or push the order into a lower priority queue.

Why 30, 40, 30 on repeat production

Once the relationship is established and the product is running in volume, a 30% deposit, 40% on production completion pre shipment, and 30% on receipt of documents balances cash flow for the buyer with production security for the factory. This is a common structure in Guangdong factories for recurring buyers.

The distributor cash flow trap

For buyers running a distribution model, a common trap is that their factory deposit is due before the distributor deposit has been collected. If the distributor pays 30% on order but the factory needs 50%, the buyer's own working capital fills the gap. Over multiple SKUs and containers this can become a significant exposure.

We address this in the commercial structure we recommend to buyers who distribute, for example by extending terms with the factory or staggering SKU launches to smooth the cash flow curve.

Escrow and letter of credit alternatives

Buyers concerned about deposit risk can explore letter of credit or escrow structures. These add cost and paperwork but significantly reduce risk for large first orders from unfamiliar factories. For orders above USD 200,000 with a new factory, we typically recommend at least evaluating a letter of credit.