China Factory vs Trading Company vs Sourcing Agent: B2B Buying Guide

For overseas distributors and brand owners, factories and trading companies are the most familiar. You have more or less dealt with factories or trading companies already. Relatively speaking, the role of a sourcing agent is something many distributors have not touched. Today, standing from an objective angle, I will give a good talk to those overseas distributors about the differences among these three roles, and their current situation in China.

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🏭 Factories

This is the place many distributors dream to reach, because everyone knows that reaching the source factory means saving a good amount of cost, gaining a more advantageous price for your product in commercial competition. But reality often has many differences from what you imagine.

Factories are mainly divided into two types:

Type 1: Large-scale Factories

These factories have their own brands and foreign trade sales teams.

• Advantages: Big scale and high output. They can serve OEM/ODM orders for big brand owners.
• Disadvantages: Very obvious. For small and medium distributors, your demand volume is far below the factory’s MOQ (Minimum Order Quantity), so naturally, the factory is not willing to take your orders. Also, the communication cost of this kind of factory is high; layers of approval will make the delivery time longer. Lastly, actually, the cost of cooperating with large factories will not be low either, because it itself has very high sales expenses that need to be added into the cost.

Type 2: Traditional Factories

These factories are only responsible for production and have no ability or energy to expand overseas sales.

• Advantages: Flexible communication, and the contact person many times is directly the boss himself. The MOQ is low because small factories fight for survival; they will not pick clients like large factories do. As long as there is a certain profit, traditional factories will be willing to take orders. For overseas small and medium distributors, these traditional factories are like a treasure existence. As long as you can connect with this type of factory, your product cost in the early stage will be reduced a lot.
• Disadvantages: They do not understand the needs of overseas clients, requiring the contact person to handle order details and connections very patiently. They do not know English or other languages, making communication difficult, so they extremely rely on trading companies or sourcing agents to act as the middle service role. Among those factories I have visited, many factories refuse to connect with overseas clients personally. Some factories are even unwilling to receive foreign currency during the order process. They think these works are too troublesome, and they hope to have a middleman to help them handle these things.

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⚖️ Trading Companies

Trading companies are the so-called middlemen. Not all middlemen are a derogatory term. Trading companies also provide very high value. Just like mentioned before, for the traditional factories’ business going overseas, trading companies have a very big contribution. Trading companies understand clients, understand factories, and understand logistics. It stands between the client and the traditional factory, perfectly solving many problems that originally existed but were hard to solve.

The problem of trading companies that makes many overseas distributors criticize is mainly that they earn too much price difference in the middle, causing overseas distributors actually not getting the ideal purchasing price, while often the factory side also only gets the thinnest profit margin. This will make the factory try hard to pursue how to create more profit during the production process. In the end, because of these reasons, the product quality problems are still paid by the overseas distributors.

Because of the development of the Internet, now information gap is less and less. Many trading companies in China started to have survival pressure a few years ago. Overseas distributors started to avoid trading companies consciously; as for the reasons, we have mentioned them before. But trading companies are a great hero for Chinese manufacturing going overseas. If there were no trading companies, relying on factories themselves to go overseas to find clients, it would be simply unimaginable.

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🤝 Sourcing Agents

Sourcing agents have company mode and individual mode. Sourcing agents belong to service-type business, acting as a waiter role between overseas distributors and manufacturers. This role is not like a trading company that relies on earning the price difference to make a profit; it mainly relies on charging a fixed percentage of service fee to make a profit.

Sourcing Agent Companies

This type usually is a sourcing agent team with a certain scale, having many people and very clear division of labor; each post does its own duty.

• The Short Board (Disadvantage): Having many people means the company’s operating cost is on the high side, so the service fee of sourcing agent companies generally starts from 5%. Too many contact people will lead to many things disconnecting, and there will also be situations where you cannot find the contact person after working hours, because the vast majority of them are just employees going to work, and the time after work belongs to themselves.

Individual Sourcing Agents (MR. TAN)

Very clearly, MR. TAN belongs to this type. My difference from a sourcing agent company is:

• My working time is very free, and there will not be a situation where you cannot find the contact person after work time. All factory visits, production follow-up, quality inspection, and logistics arrangements are completed by myself. I am very clear about all the work arrangements of the client, and the client can know all the order progress details he wants to know through me at any time.
• Because I do not have high expenses, my personally set service fee is on the low side, only needing 2%–5%, and at most 5%.
• Moreover, I personally guarantee that I absolutely do not collect kickbacks or commissions from manufacturers; this is the bottom-line principle of my work. This is also my difference from other individual sourcing agents—I don’t know if others will collect it, but I guarantee I myself will not collect kickbacks. In this way, I can confidently and righteously help clients ask for more favorable cooperation conditions from the factory.
• Of course, an individual sourcing agent like me also has disadvantages, which is not enough hands, and all things need to be handled by myself. Currently, because the clients I serve are not many, I can completely cope with it by myself (occasionally my wife will help me handle some document issues for client connection). Later, when there are more clients, I will definitely hire one or two assistants to help me handle some trivial things.

The above is MR. TAN’s personal analysis of the three roles of factory, trading company, and sourcing agent from an objective angle. Hope this helps you recognize the positioning of these three roles, and can help you find the cooperation plan you want in your future purchasing work.