Machinery and equipment suppliers often sell a very high prices. In addition, machinery and equipment is often made to particular customer specifications. These factors, among others, present unique credit risks for suppliers. In a difficult economic environment, such as we have been in for the last three years, payment issues are likely to arise.
I wish there was a low-cost, one-size-fits-all mechanism for eliminating the risk of non-payment. If such a thing exists, I do not know what it is, but I can offer some practical thoughts on keeping the risk relatively low. If anyone has better ideas, or additional ideas, please leave them in a comment.
1. Know your customer. If you have a prior relationship with the customer, what was their payment history? Is information available regarding their financial status? Can you ask for it?
2. Get a down-payment and structure the financial risk. A substantial down-payment may substantially reduce the risk of non-payment. It is a good idea to try to structure contractual payments to payment milestones that always keep your production costs covered. Sometimes, a discount for early cash payment is well worth giving to help ensure payment.
3. Consider requiring a letter of credit or bank guarantee. Letters of credit and bank guarantees seem more common in Europe than in the U.S. From the supplier's point of view, they represent the "gold standard" of payment security. However, they are costly and also tie up the customer's working capital, so customers will often balk at supplying them. Make sure the conditions for drawing on the letter of credit are clearly stated.
4. A security interest in the equipment may or may not be a good option. It is common in the U.S. to take a security interest in goods until payment is made. As a practical matter, a security interest allows the seller to take back the goods in the event of non-payment and to re-sell them. This option may not, however, be practical for machinery, particularly if it is customized or is permanently (or semi-permanently) installed at the customer's location. If a security interest is an option, consult with a lawyer about the necessary filings to perfect and protect the security interest.
5. If a customer does not pay, be proactive. Call the customer and enquire about payment status. If the risk of non-payment appears substantial, consult a creditor's rights attorney as soon as possible.
I wish there was a low-cost, one-size-fits-all mechanism for eliminating the risk of non-payment. If such a thing exists, I do not know what it is, but I can offer some practical thoughts on keeping the risk relatively low. If anyone has better ideas, or additional ideas, please leave them in a comment.
1. Know your customer. If you have a prior relationship with the customer, what was their payment history? Is information available regarding their financial status? Can you ask for it?
2. Get a down-payment and structure the financial risk. A substantial down-payment may substantially reduce the risk of non-payment. It is a good idea to try to structure contractual payments to payment milestones that always keep your production costs covered. Sometimes, a discount for early cash payment is well worth giving to help ensure payment.
3. Consider requiring a letter of credit or bank guarantee. Letters of credit and bank guarantees seem more common in Europe than in the U.S. From the supplier's point of view, they represent the "gold standard" of payment security. However, they are costly and also tie up the customer's working capital, so customers will often balk at supplying them. Make sure the conditions for drawing on the letter of credit are clearly stated.
4. A security interest in the equipment may or may not be a good option. It is common in the U.S. to take a security interest in goods until payment is made. As a practical matter, a security interest allows the seller to take back the goods in the event of non-payment and to re-sell them. This option may not, however, be practical for machinery, particularly if it is customized or is permanently (or semi-permanently) installed at the customer's location. If a security interest is an option, consult with a lawyer about the necessary filings to perfect and protect the security interest.
5. If a customer does not pay, be proactive. Call the customer and enquire about payment status. If the risk of non-payment appears substantial, consult a creditor's rights attorney as soon as possible.
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