Kitchen Knife Payment Terms: T/T, L/C and Open Account Risk Allocation

Payment terms are where the real negotiation happens in an import programme. Unit price is visible and gets compared; payment structure quietly changes the cost of capital, the risk allocation and the leverage each side holds. A supplier who moves on terms is often conceding more than one who moves on price.

This article sets out the common structures, where the risk sits in each, and what to agree in writing.

Risk allocation by structure

The pattern: the buyer's risk falls as the structure moves from advance payment to open account, and the seller's risk rises by the same amount. There is no structure that removes risk — only one that allocates it.

What buyers actually want, and what it costs

Retail and distribution buyers generally want open account terms, because their own cash cycle depends on selling the goods before paying for them. A supplier extending open account is financing the buyer's working capital, and that has a cost. Two ways it is recovered:

• In the unit price. A supplier offering 60-day terms will price the cost of funds into the quote. The terms are not free.
• In the risk premium. A supplier with no credit history on the buyer will price the possibility of non-payment, which is usually more expensive than the cost of funds.

The implication for a buyer: asking for longer terms is asking for a price, whether or not it appears on the quotation. It is legitimate to ask, and it is more productive to ask early — a terms discussion after the price is fixed tends to produce a refusal rather than a trade.

The deposit and what it is for

In a knife programme the deposit funds materials. Blade steel, handle materials and packaging are purchased specifically for the order, and the factory is committing cash before it has a finished product to sell to anyone else. That is the legitimate reason a deposit exists. It is not primarily a guarantee of good faith.

Two practical points:

• Link the deposit to the tooling and material commitment, not to a percentage reflex. If tooling is charged separately, the deposit should not double-count it.
• Set the balance trigger precisely. "Before shipment" is ambiguous: before the container is loaded, before it sails, or on presentation of the bill of lading? The distinction matters when a shipment is rolled to a later vessel — see lead time management.

Letters of credit: when they earn their cost

An L/C protects both sides through a bank's undertaking to pay against compliant documents. It is worth its cost when the order value is large and the relationship is new. It is not worth its cost when it adds days to every shipment and the relationship has years of history.

If you use an L/C, the highest-value design decision is linking payment to an independent inspection certificate. That converts the L/C from a payment guarantee into a quality control. See AQL inspection and reading inspection reports for how to define the trigger.

Credit insurance and factoring

Where a supplier resists open account, credit insurance is a way to bridge the gap: the supplier insures the receivable and extends terms. The cost sits somewhere in the price, but it can unlock a structure neither party could otherwise accept. Export credit agencies and private insurers both offer cover for importers in most markets.

What to put in writing

• The exact balance trigger, defined by a document or a milestone, not by a phrase
• Currency of payment, and who bears the FX cost
• Bank charges: which side pays which
• What happens if the shipment is delayed through the seller's fault, or through the buyer's
• Whether any deposit is refundable, and under what conditions
• How a quality claim is handled once payment has been made — the point most agreements leave vague, covered in supply contract clauses

FAQ

Is 30/70 a fair split for a first order?

It is the most common structure in the trade and is generally defensible where tooling is charged separately. The more important question is what the 70 percent is paid against.

Can I refuse to pay a deposit?

You can, and many factories will still make the order with a smaller deposit or none — at a higher unit price, because they are now financing the materials.

What if the goods fail inspection after the deposit is paid?

That is what the balance trigger is for. Structure the terms so that a failed inspection means the balance is withheld and the remedy is defined. Without that, the deposit is a sunk exposure.

Are cash-in-advance terms ever a red flag?

On a first small order, no. A factory with a full order book refusing any terms on a large order is telling you either that it does not need the business or that it is not confident about the outcome.