Before you issue your first purchase order in China, you need more than a quote and a friendly chat on WeChat. You need a term sheet that locks down payment stages, tooling ownership, tolerances, inspection rules and how delays will be handled. In this article I walk through the structure I use with European SMEs so that the first order feels controlled instead of hopeful.
Why term sheets matter before the first PO
A term sheet is not a full legal contract, but it is where commercial reality becomes visible. It forces both sides to write down what they think will happen, when and under which conditions.
- It reduces misunderstandings between sales people, engineers and finance on both sides.
- It gives you a simple document you can walk through with your own team before you commit.
- It surfaces red flags early, for example unclear tooling ownership or resistance to inspection.
You can later wrap the same content into a more formal contract, but even a simple term sheet makes a large difference compared to only using email and a pro forma invoice.
Payment structure
A clear payment schedule removes tension and keeps both sides accountable. If it stays vague, you are almost always the one taking the larger risk.
- Deposit, often 30 percent, tied to tooling approval or the start of production. For new suppliers and new products I prefer to link it to a sample or first article, not only to a calendar date.
- Mid stage payment, optional and usually only relevant if production spans more than 45 to 60 days or if order value is very high.
- Final payment, after third party or buyer inspection and before shipment. Avoid structures where you pay 100 percent before anyone has looked at the goods.
Rule of thumb, link every payment to a milestone you can verify with documents, photos or inspection reports.
Tooling, molds and ownership
For anything that requires molds, jigs or fixtures, the term sheet is where you decide who owns what and what happens if the relationship changes.
- State clearly who pays for tooling and who owns it. Unless there is a strong reason otherwise, ownership should sit with you when you fund the tool.
- Require written confirmation that the supplier will not use your tooling for other customers or private orders.
- Specify expected lifetime, maintenance routines and who pays when a tool reaches end of life earlier than planned.
- Describe how tools can be moved, for example notice period, who covers packing and transport if you decide to switch suppliers.
Quality, inspection rules and defects
Your term sheet should say exactly how quality will be checked, by whom and what happens when goods do not pass.
- Inspection level, for many consumer goods AQL 2.5 for major defects and 4.0 for minor is a reasonable starting point, but it should match your category.
- Timing, pre shipment inspection at 100 percent finished goods and at least 80 percent packed is the most common setup.
- Re inspection, if an inspection fails, the supplier covers the cost for re inspection after rework.
- Defect handling, clear language on whether you expect rework, replacement, discounts or credit notes and within which time window after delivery you can raise claims.
Specifications and tolerances
Many problems are not caused by bad faith but by incomplete specifications. Your term sheet can act as an index pointing to the documents that matter.
- Reference to technical drawings, with drawing numbers and revision dates.
- Material specifications, including grade, density, finish and any relevant standards.
- Color references, for example Pantone codes or physical master samples, and how color will be judged.
- Functional tests and pass or fail criteria, for example load tests, burn tests or dimensional checks.
- Packaging specifications, including carton strength, labels, barcodes and any drop or vibration tests.
The key is that both sides talk about the same version of each document. Version control is often more important than having perfect specifications on day one.
Timelines, delays and buffers
Delivery dates tend to slip when they are only loosely written in email. Your term sheet is the place to define timing and consequences.
- Production lead time from deposit and final approved sample to goods ready date.
- How early the supplier must confirm or adjust the estimated ship window so that you can book space and inform customers.
- What happens when delays repeat, for example priority on the line, partial shipments or small penalties.
I often include a realistic internal buffer between the ready date in the term sheet and the date we promise to our own customers. It keeps stress levels down when something minor happens.
Incoterms, logistics and risk
Incoterms and logistics responsibilities are simple on paper but messy in practice if they are not written down early.
- Specify which Incoterm you use, for example FOB Shanghai, FCA supplier factory or DAP your warehouse.
- Clarify who books freight, who pays which part of the logistics chain and when risk transfers.
- Mention whether you or the supplier handle export customs declarations and what documents you expect for import clearance.
Even if you use a freight forwarder for all shipments, writing this into the term sheet reminds everyone that transport is part of the total landed cost and should be considered early.
Red flags to watch
Over the years a few patterns repeat themselves. When I see these, I slow down the process instead of speeding it up.
- Supplier refuses to sign anything until a deposit is paid or keeps pushing for a very high advance payment.
- Tooling ownership language is vague, or your questions about future tool transfer are ignored.
- No version control on drawings or samples, everything is shared in chat with no dates or revision marks.
- Strong resistance against third party inspection, even if you are paying for it.
- Overly confident statements like "we never have problems", instead of a concrete plan for how they handle defects.
Simple example structure
A real contract will be longer, but for many SMEs a one or two page term sheet structured like this is enough for the first order.
- Parties and product scope.
- Payment terms and milestones.
- Tooling and ownership rules.
- Specifications, tolerances and reference documents.
- Inspection rules and defect handling.
- Timelines, lead times and delay handling.
- Incoterms and logistics responsibilities.
- Validity period and how changes will be documented.
Term sheet FAQ
Is a term sheet enough or do I need a full contract?
For many smaller and mid sized orders a clear term sheet, combined with a good relationship and a solid purchase order, is already a big step up from informal email threads. For higher values or long running projects it is usually worth turning the term sheet into a more formal contract with legal review on both sides.
When should I introduce the term sheet?
I prefer to introduce it after you have a realistic quote and basic feasibility confirmed, but before you send any deposit or tooling payment. At that stage both sides are interested but not yet locked in, which makes it easier to negotiate details without pressure.
Can I reuse the same term sheet for several suppliers?
Yes, in fact it is helpful to have your own base template and then adjust it slightly per category and supplier. Over time you will learn where you need more detail and where you can keep things simple.
Do suppliers in China accept this kind of structure?
Serious suppliers are used to working with structured buyers. They may not call it a term sheet, but they recognise the topics. If a supplier refuses any written alignment at all, that is in itself useful information about the future relationship.
Closing thoughts
A term sheet is not about creating a mountain of paperwork. It is about writing down the key rules for money, quality, timing and risk in a way that both sides can understand and remember. If you want help drafting one tailored to your product category, or reviewing what you already use, I am happy to share templates, examples and a few more red flags that are specific to furniture, electronics or consumer goods.