The Factory That Wasn't: Payment Counterparty Red Flags

Updated February 2026 | Supply chain verification

You've been working with your "factory" for 6 months.

Everything looks right:

• Factory videos showing production
• Business license on file
• Factory address confirmed
• Quality seems okay
• Pricing is competitive

Then you check who you're actually paying.

Bank account name: Trading company registered in Hong Kong.

Bank account location: Not the factory's city.

Legal entity: Different from the factory name.

You're not paying the factory.

You're paying a middleman who controls your supplier relationship.

And you just lost leverage, transparency, and 15-30% in hidden markup.

Why This Matters

When you pay someone other than the actual manufacturer, you create problems:

Problem 1: You have no direct relationship

The factory doesn't work for you. They work for the trading company.

When problems emerge:

• You can't escalate directly
• The factory won't take your calls
• The trading company filters/delays information
• You're negotiating through a middleman who controls access

Problem 2: You're paying 15-30% markup

Trading companies add margin. Always.

Factory price: $7.00
Trading company price to you: $9.00
Your "direct factory" pricing: 28% markup

You think you're saving money sourcing direct.

You're not.

Problem 3: You can't verify anything

Who's really making your product?

• The factory in the videos?
• A sub-supplier the trading company uses?
• Multiple factories depending on capacity?

You don't know. The trading company controls the information.

Problem 4: You have no legal leverage

Your contract is with the trading company, not the factory.

If quality fails or production delays:

• The factory has no obligation to you
• The trading company can blame the factory
• You can't enforce terms with the actual manufacturer

Problem 5: The factory can replace you

The trading company can move your production to any factory.

Or sell your design to other buyers.

Or use your tooling for someone else.

You thought you had a factory partner. You have a middleman you're trapped with.

The Pattern Across Asia

This isn't unique to China. It happens everywhere - but differently in each country.

China: Hong Kong trading companies

The pattern:

Sales rep claims to be "the factory."

Company name sounds like a manufacturer: "Shenzhen ABC Manufacturing Co., Ltd"

But payment goes to: "ABC Trading (Hong Kong) Limited"

Why it happens:

Chinese factories often use Hong Kong entities for foreign payments:

• Easier foreign exchange
• Lower taxes
• Simplified export documentation

Sometimes legitimate. Sometimes not.

Red flags that it's a trading company:

• Hong Kong registered address (not mainland China)
• Bank account in Hong Kong or offshore
• Sales rep based in Shenzhen/Guangzhou but company registered in HK
• No mainland China business license provided
• "Manufacturing" company has no factory address

How to verify:

Check China business registration:

• Real factory = mainland business license with factory address
• Trading company = only HK registration, no mainland manufacturing entity

Visit the factory and verify:

• Do they own the equipment?
• Do they have workers on payroll?
• Is the business license on the wall the same entity you're paying?

Vietnam: Hanoi/HCMC trading companies pretending to be factories

The pattern:

"Factory" gives you a Hanoi or Ho Chi Minh City address (office location).

Actual production happens in Binh Duong, Dong Nai, or Hai Duong (industrial zones).

Payment goes to a company registered in Hanoi.

Why it happens:

Vietnam has less transparent business registration than China.

Easy for Hanoi-based traders to:

• Claim they're manufacturers
• Show factory videos (rented access or partner factories)
• Keep buyers away from actual production

Red flags:

• Company registered in Hanoi/HCMC (commercial hub) but claims to manufacture
• Office address is payment address
• "Factory" address is different from business registration
• Won't let you visit without advance notice (coordinating access to real factory)

How to verify:

Check Vietnam business registration:

• Manufacturing companies should be registered in industrial zones
• Hanoi/HCMC registration = likely trading company or sales office

Visit unannounced:

• Go to the registered address
• If it's an office building, not a factory = trading company

Ask for: Tax code, manufacturing license, local worker registrations

India: Export houses in Mumbai/Delhi managing Gujarat/Tamil Nadu production

The pattern:

Sales contact is in Mumbai or Delhi (export hub).

Payment goes to "ABC Exports Pvt Ltd" in Mumbai.

Actual production happens in Ahmedabad (Gujarat), Tiruppur (Tamil Nadu), or Bangalore.

Why it happens:

India's export sector is dominated by export houses (trading companies) that:

• Aggregate production from small manufacturers
• Handle export documentation and logistics
• Manage foreign buyer relationships

Many small Indian manufacturers don't export directly.

Sometimes legitimate (export house model). Sometimes hidden markup.

Red flags:

• Company name includes "Exports," "International," "Overseas"
• Payment city (Mumbai/Delhi) different from production city
• Sales rep has never visited the production facility
• Can't give you direct factory contact
• Vague about "our manufacturing units"

How to verify:

Check Indian company registration:

• Export houses register as "Export" or "Trading" companies
• Manufacturers register with industrial licenses

Ask directly: "Are you the manufacturer or an export house?"

• Legitimate export houses will tell you (it's a known business model)
• Traders pretending to be manufacturers will dodge the question

Visit production facility:

• Verify ownership (do they own the factory or coordinate with "units"?)

Indonesia: Jakarta trading companies coordinating production elsewhere

The pattern:

Sales office in Jakarta.

Payment to Jakarta-registered company.

Production happens in Surabaya, Bandung, or Java industrial zones.

Why it happens:

Indonesia's manufacturing base is less developed than China/Vietnam.

Many "manufacturers" are actually:

• Jakarta-based traders coordinating with small workshops
• Consolidators aggregating capacity
• Former importers who pivoted to selling production capacity

Red flags:

• Jakarta registration (capital city, not industrial zone)
• Company is less than 3 years old (new player capitalizing on China+1 demand)
• Vague about factory location
• Can't provide manufacturing license
• "We work with multiple production partners" (consolidator, not manufacturer)

How to verify:

Visit the production facility:

• If they won't give specific address = trading company
• If address changes between visits = multiple factories, not one manufacturer

Check business registration:

• Manufacturing companies register in industrial zones
• Jakarta registration = likely trading/export company

How to Spot Payment Counterparty Issues

Before you sign anything:

1) Verify the payment counterparty matches the factory

Ask for:

• Business license / company registration
• Bank account details
• Factory address

Check:

• Does company name on bank account match business license?
• Is bank account location the same city as factory?
• Is the registered business a manufacturer or trading company?

Red flag:

• Payment to different legal entity than factory name
• Bank account in different city than production
• Company registration says "Trading" but they claim to manufacture

2) Visit the factory and check ownership

During factory visit, verify:

• Is the business license on the wall the same entity you're paying?
• Do they own the equipment or is it leased/shared?
• Are workers employed by the entity you're paying?

Ask:

• "Who owns this facility?"
• "What's the legal entity name?"
• "Is this the same company I'm paying?"

Red flag:

• Business license on wall doesn't match payment entity
• They dodge ownership questions
• "We're part of a group" (code for: trading company managing multiple factories)

3) Cross-check contracts and payment details

Your contract should be with the manufacturer, not a separate entity.

Check:

• Contract signed by: Factory legal entity
• Payment to: Same factory legal entity
• Business license: Same factory legal entity
• Invoice from: Same factory legal entity

If these don't match = you're paying a middleman.

4) Ask directly

Sometimes the simplest method works:

"Are you the manufacturer, or do you coordinate production with factories?"

Legitimate manufacturers will say: "We manufacture."

Legitimate trading companies/export houses will say: "We coordinate with manufacturing units."

Traders pretending to be manufacturers will dodge:

• "We're a manufacturing company" (vague)
• "We have our own facilities" (doesn't answer the question)
• "We control production" (controls ≠ owns)

5) Check online presence

Real factories:

• Website shows factory photos, equipment, workers
• Company registration listed on website matches payment entity
• Address is factory/industrial zone location

Trading companies:

• Website shows product photos (generic or stock images)
• No factory photos or only exterior shots
• Address is office building in commercial district
• Company name sounds like manufacturer but registration is trader

The Legitimate Exceptions

Sometimes paying a different entity is okay:

1) Hong Kong payment entity for mainland China factory

Chinese manufacturers often use HK entities for foreign payments (tax/forex reasons).

Legitimate if:

• Mainland factory is owned by same parent company
• You can verify factory ownership
• Contract specifies both entities and relationship
• You have direct access to factory

Still risky because:

• Legal enforcement is harder (HK vs mainland jurisdiction)
• Factory can claim "we don't have contract with you, talk to HK entity"

2) Indian export houses (disclosed)

India's export house model is legitimate when disclosed.

Acceptable if:

• They tell you upfront they're an export house
• They give you direct access to production facility
• Pricing is transparent (you know the markup)
• Quality control is clear (who's responsible)

Not acceptable if:

• They pretend to be the manufacturer
• They won't disclose production location
• They control access and filter information

3) Factory group with shared services entity

Large factory groups sometimes have:

• Manufacturing entity (owns factory)
• Trading entity (handles exports)

Legitimate if:

• Both entities are disclosed
• Ownership structure is clear
• You have access to manufacturing entity
• Contract specifies responsibilities

What Happens When You're Paying a Middleman

Real case pattern (anonymized):

Importer works with "factory" for 18 months.

Everything fine until quality issue emerges.

Importer: "We need to rework this batch."

Sales rep: "I'll check with the factory."

Importer: "What do you mean 'check with the factory'? Aren't you the factory?"

Sales rep: "We coordinate production. Let me ask them."

Factory's response (through sales rep): "Rework will cost extra. Not our problem."

Importer: "Our contract says rework is your responsibility."

Sales rep: "Contract is with us, not the factory. We'll negotiate with them on your behalf."

Translation:

• Importer has no direct relationship with manufacturer
• Trading company controls all communication
• Factory has no contractual obligation
• Importer is trapped

Resolution options:

1. Pay extra for rework (trading company adds markup)
2. Accept defective goods
3. Fight the trading company (who will blame the factory)
4. Try to contact factory directly (trading company blocks access)

All options are bad.

Because the importer didn't verify payment counterparty before production started.

How to Fix It (If You're Already Paying a Middleman)

If you discover you're paying a trading company, not a factory:

Option 1: Negotiate direct relationship

Ask the trading company:

"We'd like to work directly with the factory. Can you introduce us?"

If they agree:

• Get factory's legal entity and contact
• Negotiate new contract directly with factory
• Restructure payment to go directly to factory
• Pay trading company a one-time introduction fee (if appropriate)

If they refuse:

• They don't actually control the factory, or
• They want to protect their markup

Either way, you know where you stand.

Option 2: Verify the real factory and negotiate transition

Find out who's actually manufacturing:

• Visit factory (unannounced if possible)
• Get factory legal entity and contact
• Reach out directly

Negotiate:

• Direct contract with factory
• Direct payment
• Transition away from trading company

Expect resistance:

• Trading company will try to block (they lose the account)
• Factory may be loyal to trading company (long relationship)

But it's possible if:

• Your volume is significant
• Factory wants direct buyers
• You offer reasonable terms

Option 3: Accept trading company relationship but renegotiate terms

If you can't go direct:

• Demand transparency (who's really manufacturing)
• Renegotiate pricing (reduce middleman markup)
• Get direct access to factory for QC
• Add accountability clauses to contract

At minimum:

• Know who you're paying and why
• Verify the markup you're paying
• Get factory access for inspections

Option 4: Find a real factory and transition

If trading company won't cooperate:

• Source a real manufacturer
• Verify payment counterparty first this time
• Transition production

Expensive but sometimes necessary if:

• Trading company markup is too high
• They block access and transparency
• Quality/communication issues can't be fixed

How We Verify Payment Counterparty

This is standard in our supplier verification process:

Step 1: Document request

Before factory visit, we request:

• Business license
• Bank account details
• Company registration
• Tax registration
• Factory ownership proof

Step 2: Cross-check documents

We verify:

• Does bank account name match business license?
• Is company registered as manufacturer or trader?
• Is bank location same city as factory?
• Do all documents reference same legal entity?

Step 3: On-site verification

During factory visit:

• Business license on wall matches payment entity?
• Factory is owned by entity we're paying?
• Workers employed by manufacturer or staffing agency?

Step 4: Ownership verification

We ask directly:

• "Who owns this factory?"
• "What's the legal entity name?"
• "Who are we paying and why?"

If answers are clear and consistent = direct factory relationship

If answers are vague or inconsistent = trading company

Step 5: We force disclosure

If it's a trading company, we tell the client:

"You're paying [Trading Company X], not the factory."

"The factory is [Factory Y], located in [Location]."

"Here's the markup: Factory price $7, you're paying $9.50."

Then we give options:

• Negotiate direct with factory
• Renegotiate with trader for transparency
• Source alternative manufacturer

We don't hide it. We expose it.

Because you can't make good decisions with bad information.

The Bottom Line

You can't manage what you can't see.

If you're paying a trading company and don't know it:

• You have no direct factory relationship
• You're paying 15-30% markup
• You can't enforce contracts with the manufacturer
• You have no leverage when problems emerge

Verify payment counterparty before you commit.

It's easier to avoid the problem than fix it after 18 months of production.

Ask:

• Who am I paying?
• Do they own the factory?
• What's the markup?
• Can I work directly with the manufacturer?

Verify:

• Business license matches bank account
• Company registration says "manufacturing," not "trading"
• Bank location matches factory city
• On-site visit confirms ownership

If it doesn't check out:

• Walk away
• Or negotiate direct relationship
• Or accept trading company role but demand transparency

Don't assume "factory" means factory.

Verify who you're really paying.

Frequently Asked Questions

Q: How common is it to unknowingly pay a trading company instead of a factory?

Very common, especially for first-time importers. In China, we estimate 30-40% of "factories" marketed to foreign buyers are actually trading companies. In Vietnam, it's higher (50%+) because the supplier base is less mature. In India, export houses are common and often legitimate, but many buyers don't know they're working with middlemen.

Q: Is it always bad to work with trading companies?

No. Legitimate trading companies can add value: consolidating orders, managing logistics, providing backup suppliers. The problem is when they pretend to be factories, hide their markup, and block direct access. If a trading company is transparent about what they do and how much they charge, the relationship can work.

Q: What if the factory insists on using a Hong Kong entity for payment?

Common for Chinese factories (forex/tax reasons). Verify: Does the factory own the HK entity? Is it disclosed in contracts? Do you have direct access to the mainland factory? If yes to all three, it can work - but add legal clauses specifying both entities and enforcement jurisdiction.

Q: How do I verify factory ownership if I can't visit in person?

Virtual verification is harder but possible: Request business license, tax registration, and photos of license displayed in factory. Video call during production hours. Check business registration databases (China has public systems). Use third-party verification services. But nothing replaces an on-site visit for confirming ownership.

Q: What if my payment counterparty is different because of legal/regulatory reasons?

Some countries require certain structures (free trade zones, export licenses). Ask: Why is payment going to a different entity? What's the relationship? Can you verify it? Legitimate structural reasons should be clearly explainable and verifiable. If they can't explain it clearly, it's likely a trading company situation.