Avoiding non-payments

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.