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Is it safe for buyers to approve payments before delivery?

3 MIN READ
Oct 18, 2023

Our recent article on how buyers are using a new light form of “cash against documents” to make early payments at shipment to suppliers has triggered an enthusiastic response - click here to read the article.

PrimaTrade cash against documents for early payment

Cash against documents - a new and easier way via PrimaTrade

To approve or not to approve?

The traditional model suggests that buyers should not go “on risk” for supplier payments until either:

But our PrimaTrade platform is scaling fast with a much lighter model where:

The lighter model is used principally for fast-moving consumer goods (“FMCG”) and supply chains where buyers transact directly with their supply chain.

How do buyers get comfortable?

Buyers want to know:

In many supply chains, the risks of approving before delivery and against scan-copy documents are very low:

  1. Repetition: many supply chains, particularly in FMCG, are repeating with multiple overlapping purchase orders and shipments; issues on one shipment can be adjusted against the next.

  2. Reputation: in the FMCG supply chain, buyers meet suppliers and select them. Suppliers have reputations and track records within their niches and individuals at the buyers know each other and often compare notes – leading to a basic level of confidence between buyer and supplier.

  3. Direct dealing: many supply chains operate directly without intermediate traders. Ownership of the goods goes from the supplier to the buyer directly and so does the shipment.

  4. Buyer logistics: most international trade in FMCG is on FOB or similar Incoterms. So the buyer arranges the logistics and has, via their forwarder or appointed carrier, possession of the goods before payment. The transport paperwork provided by the supplier is a copy of the paperwork created by the buyer’s own agent.

  5. Part-payment: PrimaTrade’s platform allows buyers to give percentage approvals. Buyers set the percentage using our rules engine based on the supplier performance – from 50% for some perishable products up to 90% or 95% for garments and hard consumer goods. The balance is paid later to the supplier after goods are checked and any deductions have been applied.

  6. Set off: In repeating supply chains, part-payments allow the buyer to build up a set off position against the supplier – eg: if the supplier ships weekly on 90 day terms and the buyer pays 90% early, then after 70 days the buyer has an entire shipment in hand (10 weeks x 10% retained).

How do buyers benefit?

The supplier has two main risks, “Can the buyer pay?” and “Will the buyer pay?”.

Managing these risks can be costly for suppliers even if the buyer is a top-rated credit. Often suppliers have to take out expensive insurance, post additional collateral or pay high interest rates to bridge the gap between shipment and payment.

This leads directly to two big benefits for buyers.

  1. Discounts for early-approval and early-payment: Early payment saves the suppliers more than they cost the buyer to provide. This allows the buyer to earn additional discounts (1% or more) which can be used directly to reduce the price of goods.

  2. Supply chain agility: if buyers are able to approve and even pay at shipment, this typically removes the need for down-payments and often means it is easier to add new suppliers.

How hard can it be?

PrimaTrade’s platform is middleware and sits in between the buyer ERP environment and the supply chain and so the platform can usually go live without an IT project. Data flows in from the suppliers and all the approval and payment processes (including funding) are handled within the platform.

The benefits of approvals and payments at shipment are very significant with additional discounts of 1% or more on landed costs being commonly earned by buyers.

To find out more, including how PrimaTrade is already helping large retail brands to achieve supply chain visibility and strengthen supplier relationships via early payment, please visit www.prima.trade and sign up for our company updates or book a call with one of our representatives here.

Get in touch, we don’t bite. 😉

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