Supply Chain Solutrions No.27 – Supplier Payment Terms
Having the best-fit payment terms is an important part of the supplier management process, but what are the best payment terms for my business when working with Asian suppliers?
Payment terms are directly related to the liquidity of the company and will be stipulated by the financial controller based on longer term cash flow. Ultimately, the ideal situation is going to be supplier payment is made when the customer pays the brand owner or wholesaler resulting in zero cash flow impact.
Longer payment terms will come at a cost, just like loaning money from a bank, the supplier is now bankrolling your goods, and as such will increase the price to offset the interest, they will lose by not having the funds in their account. If you want to have a zero cash flow impact and the vendor terms are not long enough you may receive payment from your customer early with a penalty of say 2.5%. If the seller has given you 60 days’ payment terms and you have opted for a penalty early payment from your customer the resulting margin reduction maybe 3-4%.
Can your business bottom line afford this? Or is it a case that the business cannot afford not to do it? Payment terms are a balance between liquidity, minimum margin and profitability.
New suppliers will practically want to have a 30% deposit and balance 70% paid before shipment particularly when both parties are unknown, and there is no business reputation. 70/30% payment should be workable providing the orders are trial orders, and it is only for the first three orders. Effectively these “trials” are an expense to the business due to additional overheads through management cost, the cost of the currency exchange and telegraphic transfer.
Where a supplier insists on maintaining a 30/70% payment ratio after the trial period, I would be wary of the seller’s liquid. If the supplier is small, order quantity is small, and the majority of raw materials are being purchased from the markets then it may be reasonable but do due-diligence, and understand why. Small suppliers do not have excess cash or overdraft support, small raw material quantities purchased from the market may need to be purchased with cash if buying stock off the floor, they may require support, so this becomes a balance of the service offered versus your liquidity.
Most downstream textile and accessory manufacturers will need 30/70% payment for new relationships then revert to 30 days, and where a longer term relationship exists, payment terms can be further extended to 90 days. From experience smaller vendors do not manage their cash well resulting in negative cash flow, larger vendors have a tendency to push their vendor payment to 120-150 days, all resulting in potential supply chain risk when the seller is put on credit hold by their vendor.
To maintain the best relationship with vendors, providing your businesses liquidity is adequate to support the payment process, 15 days from Bill of Lading issue date paid on the 15th and 30th of each month will maintain cordial relationships with limited supply disputation. 15 days’ payment terms give time for you to process and validate documentation, and the vendor then only needs to fund 15 days for raw materials and overheads. The negative or risk comes if shipment volumes are small, claims occur, and there are no outstanding payments to balance claim risk.
Various payment methods can be utilised, here we are employing open account telegraphic transfer. For more secure payment methods, Letter of Credit with Terms or Factoring maybe utilised.
Understand and manage your supply chain, the chain of custody across upstream and downstream vendors and how payment terms help ensure delivery continuity. Managing suppliers are about relationships, mutual understanding and due diligence to ensure both parties are on the same path of understanding and goal achievement.
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