The most common structure is an advance with the order and the balance before dispatch, or against shipping documents. For larger or custom machines, payments are often split into stages tied to milestones, and letters of credit are widely used for export orders.
The advance covers the factory's risk on materials and bought-out parts made for you. The balance is your leverage, so the key question is what must happen before you release it.
Common structures
- Advance and balance: a share is paid with the order, and the rest is paid after inspection and before dispatch.
- Advance and documents: the balance is paid when the factory sends copies of the bill of lading and export documents.
- Staged payments: payments are tied to milestones such as design approval, assembly complete, trial passed and dispatch.
- Letter of credit: your bank pays the factory when it presents documents that meet the terms of the credit.
- Retention: a small share is held back until installation or a performance test at your site.
- Open account: payment some time after shipment, usually only offered to established customers.
Linking payment to proof
Tie each payment to evidence, not dates. Instead of paying "30 days after order", pay when the factory shows the assembled machine, or when it passes the agreed trial. This keeps the schedule honest and gives you control.
The balance before dispatch should follow a successful inspection or factory acceptance test. Once the machine leaves the factory and the factory has full payment, any problem becomes much harder to fix. Read about FAT and SAT to plan the tests that trigger payment.
Letters of credit
A letter of credit protects both sides when it is written well. The factory knows the bank will pay if documents are correct, and you know payment only happens against those documents. You can require an inspection certificate from an independent inspector as one of the documents.
Letters of credit have bank charges and need careful drafting. Small errors in documents cause delays. Many buyers use them for first orders and move to simpler terms once trust is built.
Agree the letter of credit wording with the factory before you open it. A credit that asks for documents the factory cannot produce, or a shipment date it cannot meet, will need amendments. Each amendment costs time and bank fees.
What factories expect
Indian machinery makers usually expect a larger advance for custom machines than for standard ones. A standard machine can be sold to another buyer if you cancel. A machine built to your drawing cannot. Expect the factory to resist terms that leave it holding a finished custom machine with most of the price unpaid.
Terms usually improve with history. After a few orders paid on time, many factories accept smaller advances or longer balances. Ask openly what would make better terms possible.
Protecting your advance
For large advances, ask for an advance payment guarantee from the factory's bank. It returns your advance if the factory fails to deliver. Many smaller factories cannot or will not provide one, so weigh the risk against the order size.
Pay only to the bank account of the company named on the contract. Confirm bank details by phone with a person you know before the first payment, because changed bank details are a common fraud. For a fuller view of risk, see the safest payment terms for machinery.
Next step
We help you set payment stages, inspect before balances are released and check documents against your terms. Book a free sourcing review.