In the recent period, there have been a few significant changes in payment terms as in many cases, Letter of Credit (LC) is not as favourite among suppliers as it used to be earlier. Now many suppliers don’t work without advance, while in most of the cases, old buyers are asking for more credit period. Besides these, overseas buyers are also adding extra responsibilities on the suppliers. Due to all this, a few companies have also lost some business. In discussion with buying agents and exporters, Apparel Resources (AR) explores how all these changes and allied factors are impacting the business.
Though the majority of the industry are seeing changes, still things differ not only from company to company but even from order to order for the same buyer as there are many points to be considered before finalising the payment terms like order size, delivery time, the margin in the particular order, recent working of buyers and suppliers etc. But unlike earlier, now hardly anyone starts work on the basis of Purchase Order (PO) copy.
Many wholesalers and importers have long-term relations with suppliers (exporters) and ask for more credit periods which differ and depend on individuals. And their point is that they are forced to do so as their payment terms have changed. But wholesalers and importers are now not ready to give advance at all. Hence, suppliers’ difficulties are only increasing with each coming day.
Once Letter of Credit (LC) used to be the most prominent payment system but now industry is showing less acceptance towards LC. Many companies believe that it is only banks that get the benefits of LC but as far as the industry is concerned, stakeholders believe that amendment charges in LC is a major concern and hence, they don’t prefer to go for it.
There are examples where time period of LC too has been reduced as the earlier time limit used to be 90 days which is now reduced to 60 or even 45 days. And due to this, some exporters are also losing business as they insist on payment, once goods are shipped from here and shipping bills are submitted to the buyers.
While few exporters and buying agents are still fine with LC. Depending on the orders and margin such as large volume orders or when working with new buyers, LC is accepted by many companies.
Now many companies don’t work without advance unlike earlier as their view is that they are forced to do so mainly because of the working capital issue. Another important reason for suppliers to insist on advance is because of buyers’ stake in orders which is why it at times becomes difficult for buyers to cancel such orders, irrespective of the advance’s percentage.
Sanjeev Jain, CEO, TQM Global Buying shared that in the past, there have been a few cases when despite having a proper quality inspection, buyers later created quality issues and these issues were not genuine. In such cases, buyers intended to get more discounts or cancel the orders. Such circumstances have forced the suppliers to work on advanced payment basis.
Arun Kumar, Director of Tirupur-based Nine Square trading confirms that advance is now unavoidable and in any case, at least the cost of yarn is a must to pay as advance. The firm has already lost some perspective businesses as new buyers did not agree on LC.
Some of the companies accepted that in the case of new buyers, they work without advance but on LC and have mutual consent that there will be no amendment in LC.
Looking at the overall scenario and risk element, deferred payment is hardly in use.
An owner of one such company who works directly with buyers as well as buying agents but doesn’t wish to disclose his identity said, “We do have good and long-term relations with our buyers but we don’t do work on advance as working capital is an issue. Our old buyers also understand that advance is unavoidable.”
Though it is being said that if a supplier always insists on advance from the regular and trusted buyers, the chances of mutual business growth is impacted in such cases. While the other side of the coin is that in a few cases, some vendors are ready to do the orders even without advance or less advance, so the business shifts from one vendor to other but doesn’t go to another country.
In fact due to reasons like shortage of working capital and payment safety, the role of factoring firms is growing now. Such firms are aggressively approaching to exporters.
Lokesh Parashar, Director, ADKINDIA LLC and Spokesperson of Federation of Buying Agent Association (FBA) approves this observation as he has seen that in recent period, factoring firms’ role has significantly increased. He has noticed that such firms are offering nearly 80 per cent amount on post-shipment and charging ‘reasonable’ percentage for the same.
Indeed buyers’ expectations from suppliers have increased now and it also has an impact on cost as well as on payment terms. For example, in some cases, suppliers have to manage warehouses in India as buyers prefer to get orders shipped as per their convenience only. And this further adds a process for exporters, and in such cases to start the payment process, they have to keep the goods in the free trade zone (FTZ) or Free Trade and Warehousing Zones (FTWZs). Buyers insist to keep ready goods in India as warehousing cost is less here compared to their countries, while this process creates an additional task for exporters. Though it hardly has a cost on suppliers as buyers pay for it.
Irrespective of market conditions, for some companies, mostly big brands and retailers, there have been no specific changes in payment terms. They are following the same system as they used to do before Covid-19. There are brands and retailers who still pay after 30 days of submission of shipping bills.
