Avoiding non-payments

Published on October, 2008


I have heard complaints from foreign companies for years about the payment issues with North American customers. Credit problems are universal not just for one country.  As usual I have always blamed the Italians or the Spanish or Brazilians for selling the way they do. Anytime you sell open account to anyone and everyone and bypass the major buyers to expand your business you take risk.  In any business taking risks is part of the business however there are ways to reduce risk.

Here in USA we use credit information and there are international credit organizations who can check the credit and cooperate with any American company such as Dun & Bradstreet, Experian and many others. Most USA companies have a complete credit check and collection department to handle the finances on each customer and establish a credit limit. I find most companies in other countries do not have internal divisions to handle credit. This is a mistake. Setting credit limits is key to running a good accounts receivable department if you are going to sell open account.

Secondly, there are insurance companies who basically charge 0.75% to 1.5% of the value of the invoice. Some will guarantee 100% and others only 90%. There are USA based companies and also international companies in each country. This is a minor amount to pay for peace of mind considering that the average losses of a company can add up to be as much as 8%. In the USA this is the average losses and this percentage loss is built into the selling price to recuperate in general unforeseen losses. Another way of being self insured.

Insurance is fine but only works if the suppliers ship on time a quality product according to specifications of the purchase order. I have found in many cases this is not what happens and a customer receives bad material, seconds, poor packing, late shipments and other reasons to cause financial losses and wants the supplier to pay him for this. It is customary that suppliers do take responsibility for their actions but many do not. Suppliers must be aware of this but in most cases wish to ignore it and just say “pay me my money”. This is poor marketing and of course they do not tell the bank they shipped poor material or poorly selected material to the customer, only that the customer did not pay.

Company guarantees on credit are also good to have. Personally if I think the customer may be a risk I ask for a personal guarantee. This way if the company goes bad you can still go after the owner. If in doubt, do not extend open account.

On special orders demand deposits of 25 to 50% of the value and only extend credit on the remainder. The remainder on special order should be paid for within 30 days after delivery and acceptance. This way both supplier and customer are taking risks and when you consider the customer is paying for the freight, insurance, customs, duties, inland freight etc., he is paying more than his share.

It is true that Letters of Credit are not normal and most companies do not pay them.Why should they when the world of suppliers extends credit. Yes I do believe that a large percentage of buyers are risky and should not be sold open account. Yet I find they are being sold by suppliers. There is always a supplier who is hungry enough to take the risk, then is shocked when they do not get paid. Really, is this good business?

I find most suppliers do not know what to do if they do not get paid on time. The first thing I see by suppliers is they try and call or email or fax for payment. Some will even travel to the customers location and try to collect money. This is fine but does not always work and in fact is only effective in 20% of the cases, is my guess. Most suppliers wait too long to push the issue of collection and let it drag out beyond the terms by as much as three months more than the due date before taking serious action or just writing it off to bad credit loss.

In the United States you must put pressure on immediately. If a collection is overdue than you must state in your invoices up front the consequences. For example, if this invoice is not paid on the due date posted above, than for every month it is late you are being charged late charges of 1-1/2% or 2% per month. If the payment is not received within 90 days of the due date the invoice will be turned over to the legal department for collection and all collection fees and legal fees are for the buyers account. This should be part of the order acknowledgement fine print as we say and signed by the buyer so they know the consequences.

There are lawyers in the USA associated with collections that say they must have before the first year of due date and preferably within six months the transaction turned over and authorized to them for collection. They have a better chance of collecting. Some companies charge upfront fees, while many companies include their fees as part of the collection so there are no out of pocket expenses to the supplier. I have helped many foreign companies hire such legal assistance. There fees range from 25 to 35 percent of the invoice value and this depends on who they are the size of the invoice amount.

Suppliers can put liens on the project jobs if they are not paid on time. If you are selling a distributor you can put a lien on the warehouse and stock to maintain ownership. There are ways of doing this before perhaps the customer can sell the goods before you can collect on them.  Having a local office or agent in the market is very important especially companies doing a volume of business. These agent companies can watch over the collections, monitor them, communicate daily with the buyers, and if need be get legal or collection agencies involved quickly to help the supplier. It amazes me that so many foreign companies sell millions in this market but do not have an agent office and are willing to lose for example a $100,000 or much more yearly in bad credit when having an office/agent might have saved them 50% in their losses while costing them less in the long run. However, most suppliers have the old mentality of handling themselves internally and travelling worldwide, spending a lot of money to travel, and accomplishing little as far as collections are concerned. This is not the smartest way of handling business.

There are other issues with credit and perhaps in another article I could expand on these. The suppliers need to know their options, how to check credit, how to insure themselves against losses or reduce their losses, how to collect and when, and what are their legal options in the market. I venture to say 90% of the suppliers do not know this and do very little, thus their losses are greater. Supplier must understand that money is the only way that a buyer and his customers in turn, control that the supplier will perform. They hold out this money waiting for mistakes by the supplier so they can be charged back. Suppliers in turn must understand that the buyer is warranting his performance, his on time delivery, his stock, his cut to size, his quality and is taking great risk and if the performance is bad they are responsible and will pay for this. Sometimes this payment is far exceeding the costs. Thus if the supplier does not perform or ships questionable material the costs down the road can be much more the customer than the original costs. Most suppliers do not understand this and just want to be paid the FOB Factory price while the customer may be out five times this amount. Who is right and who takes risk?

I traveled one time in Italy with a Spanish supplier of slabs and blocks and he told me the worst payers were the Italians. I was with a Spanish company not long ago and he told me the worst payers were Spanish fabricators or contractors and he has found as much as 90 to 180 delays in accounts receivables. When you have a market that has grown in the USA a thousand percent in a few years and 70% of the now existing companies having been in business only 5 years or so, what do you expect. Yet the companies keep selling everyone and anyone. Perhaps you are missing something, the suppliers are not too smart! If they want to sell open account then do so only to those companies they have known for years who pay, and make the rest of the companies pay with guaranteed payments. I do business with hundreds of buyers and have only had a few problems in 30 years, but I know my customers well.

Would you sell a stranger 6000 miles away 20,000 dollars open account in India? I do not think so.

Credit problems are universal and I hear they have them in India, China, Italy, Brazil and Mexico and all countries. Thirty percent or so of the companies in China are going bankrupt, so I am told. I believe that in the granite kitchen countertop market which has been the biggest growth in this nation in the last ten years, that 35% of those companies are going out of business. This is to be expected and the market is oversaturated with these companies.

I am not defending the North American buyers and lack of payments.  This is historically a risk that all companies take and always have. How it is handled is the issue.