The buyers have put exporters in a very precarious position; many of them are now not even sure about continuing in the business of exports. At their whim, without even thinking of the long-term consequences, the buyers have rejected orders which were on the production floor as WIP and even those which had been shipped. Thankfully, some buyers have eventually agreed to pay, mostly at deferred dates, but the numbers are still very few.
Also Read: True face of buyers: Not intending to pay!
The protection shield for the buyers was the seemingly everyday contract that is signed when an order is placed. Buyers are smart and having built so many clauses into their contract agreements, it is impossible to circumvent these contracts and expect any way out to retracting any due payments. The only solution – appeal to the goodwill of the buyer for mercy!
As a global industry, the first wave of crisis hit suppliers at the beginning of the year when COVID-19 was still limited largely to China, affecting the availability and price of raw material supplies, and hence, shipping of goods. And thereafter, suppliers have entered the second wave of crisis, with cancellation of orders and non-payment of their running and future orders, as well as denial to pay for orders already shipped and received, exposing the unethical ways their buyers are reacting.
In the meanwhile, retailers/brands are openly and unabashedly going into administration in the UK or chapter 11 or 12 in the USA to mitigate their losses or future losses, leaving the exporters in a state of dishevel.
What are the options left with the suppliers, most of whom are already working on LC at sight…payments in advance? But is this workable when buyers are more interested to negotiate on credit basis?
How to work on credit basis when there is depletion in cash flow
In a simple case scenario, a factory doing a Rs. 120 crore turnover would require a Rs. 10 crore worth of shipment every month, on an average and a Rs. 9.5 crore of working capital for the same. Assuming that the cycle takes 3 months, it means that Rs. 28.5 crore of cash is blocked during that period. Most of this money is either through bank loans or a supplier’s internal accruals, which may lead to his selling properties to meet the requirements. On top of that, he is expected to pay salaries, even if work is not done. If this cash flow is not maintained, exports are doomed!
In the new updated situation, the hardship of the factories is going to multiply as special measures have to be implemented to safeguard the health and safety of the workers while adhering to the basic concept of social distancing. In simple terms, this means at least a 50 per cent reduction in manpower, and hence, 50 per cent reduction in productivity, but an additional cost to make the system work. On top of that, the supplier does not even know if he will be paid for his efforts!
The Government, banks and the associations have to come forward to save the industry. They have to take proactive measures to off-set the losses because of the apathy of the buyers and to some extent the inert reaction of the Government to their challenges.
Whatever the situation – cash flow crunch or payment terms with buyer, it is the exporters who are at the highest risk, without any security!
Left to themselves, the suppliers have no negotiation plank and no safety net. This decision needs to come from the Government that no payment terms other than advance or a bank consigned LC at sight should be acceptable. Else, anyone can make human error of being flexible in payment terms when they see their empty capacities. We can be much unified as an industry, but sometimes hunger can force someone to take other decisions, there has to be external enforcement!
Not sure if advance payment condition would work, as all big customers are working on 60-90 days credit out of China as well and there are other countries willing to take the plunge for business. But what could work is a policy that clearly says that we should not engage with customers without credit insurance.
Experience has proven that DA (Documents against Acceptance) is a Death Warrant for suppliers…whereas in case of DP (Documents against Payment), though buyers will have to pay if they take out the goods from the port, but if they don’t want to pay, they can easily ask the exporter to get the B/L or AWB bank free by giving any damn excuse. Yet, this is the safest option we have…I mean second to advance payment.
The idea is also to include trade associations and other trade organisations to develop this format and ensure that every buyer signs this. In case of any bad experience with the buyer regarding payments or bankruptcy, he can be sent a letter from the body for payment or may be blacklisted as a last resort.
When we draft the policy for safeguarding the payments of the suppliers, we should ensure that there is a provision for credit insurance as mandatory. Also, there is an option for what is known as ‘Third Party Finance’ which implies that a third-party is introduced to the transactions to remove the payment risk and the supply risk. Trade finance provides the exporter with receivables or payment according to the agreement while the importer might be extended credit to fulfil the trade order.
Usually, Trade Finance is a loan that delivers payment to an exporter on behalf of the importer before goods have arrived. The lender will loan money to the importer so the exporter can be paid once goods have been shipped. Collateral for these loans is usually the goods in transit.
In India, ECGC is the most visible agency that provides cover for exporters. There are, however, other factoring companies that discount invoices on non-recourse basis. To get the best from these agencies, the most desirable solution is collective negotiation of factoring deal. However, if this is possible is yet to be explored, though as of now there is no evidence of the same.
The time has come to re-think how we negotiate business and to be more cautious in contract terms to safeguard our payments to avoid the cash crunch situation we are facing today!