Working with Big Factories/Companies, payment cycles and invoice discounting

[bkkuberdude]

Greetings everyone,

I've roughly been doing business in Thailand since 2009. We just got more serious around August 2014.

I have a question.

We're providing services to some big factories comparable to Nestle etc listed at stock exchange. Mostly all these services are offered on credit with promise to pay within 3 weeks. Although according to my research payments from such big companies can take upto a maximum of 3 months in European companies. We understand how the payment cycle system works along the supply chain. Sometimes we are paid within 3 weeks of providing our services. Sometimes upto 45 days has been the max for us so far in Thailand.

Has anybody ever had any experience dealing with big factories/companies and how long do you offer credit for your services provided? Because sometimes, when we're offering plenty of services we run short of rolling money and we sometimes have to inject more. We know of "invoice discounting" and will start applying that on February with a local Bank. Does anybody has any experience and insights in this area? Do you deal with major companies and factories in Thailand? How are their payment cycles like?

My humblest regards,

Thank you

Edited January 7, 2015 by bkkuberdude

[chrisinth]

I would imagine its all about what you have said in your quotation and what the 'company' has stated in their purchase order.

Our (I imagine different services than yours) normal payment terms are 30%, 30%, 30% & 10% for the final documentation marking completion.

Milestones are set throughout the projects.

[mike324]

30 days seems to be the norm based on my experience. 3 month is too long and dangerous in Thailand, although if you sell items to large retail companies, they ask for 3 month credit but you can always negotiate as well.

[sandyf]

I used work on Sage systems with Sales Order Processing and by far the most common terms are '28 days from date of invoice'. You are right about large companies, most tend to ignore the terms and it becomes a battle of wits between their purchasing and your credit control. You have the choice of reminder letters or using the phone. I have no experience of this here but whatever approach you take I am sure that respect will bring more positive results.

I do have some experience of this problem becoming serious. When I left the RAF I went to work for my father in law, a small family business making industrial ovens. It was the height of the oil boom and they had secured a contract with BOC for welding ovens. It soon got to the point where welding ovens had become over 75% of the business and BOC were taking longer and longer to pay. Phone calls seemed to have little effect so the solicitor suggested putting BOC into liquidation. My father in law was horrified but the solicitor said he had a legal right and if nothing changed the company would go bust.

The solicitor put action in motion and when it landed on the CEO's desk sparks flew at BOC and we thought that we had lost the business. The CEO phoned my father in law and said he had made a brave move but from that day forth every invoice was paid after 7 days.

It is not a course of action to be recommended but always remember that there is a last resort.

I would suggest that if possible that you stay away from 'invoice discounting' or 'factoring' as it is often called. It is very tempting and easy to get into but once the company starts to grow it can take a great deal of money to get out of it and chances are you will be faced with the fees for evermore.

Good luck in your endeavours.

[fletchsmile]

Firstly invoice discounting or factoring can be an expensive form of finance if you're not careful. Make sure you also fully understand the terms and conditions, as well as with or without recourse. Commission rates may sound small, but when you work out the APRs it can be an expensive form of financing.

On invoice terms it can vary widely. You may have your standard terms, they may have theirs. Likely they will want to keep theirs as the larger party who are more likely in a stronger bargaining position as to how important you are.

Bear in mind theory, agreements and practice don't always match for a variety of reasons, eg some rather nastily will squeeze you as small businesses just because they can, or because they happen to be a bit short. Thailand does seem more of a country that generally plays games on this score, although there is good and bad everywhere.

It really is worth discussing up front with them in an open and honest discussion in, detail what the payment terms they are committing, and worth having someone from their accounts department in the meeting. Presented from the aspect of you want to understand their payment cycle and how you can best accommodate them. If you just discuss with say their buying department only, it's highly possible they don't know or care how the finance department actually works if a very large company. Their job is only to buy. For example you can find you agree terms like 30 days from invoice, then when you come to collect you find out their finance department only does cheque runs/ batch payments once per month on a certain date, so your agreed terms become meaningless in practice.

If relevant think also about what you're going to do with FX rates, and who bears the risk if the counterparties are European. Will they be fixed at invoice or a later date? Can be a big issue for Thailand.

Make sure you also do your checks on the credit worthiness/ ability to pay. Just because they're big doesn't mean they necessarily are in good financial shape, nor that they have positive/ good cash flows. Someone should at least look over their financials as to their cashflow statement. Calculate a few basic ratios as well like their creditor days per the accounts vs the official terms. This may flag differences between what they claim they will do and how long they really take.

Relationships are particularly important in Thailand, often more than contractual terms. Your recourse for people not doing what agreed is a lot less legally, so occasionally you have to let things go even when in the right. This can also be a good negotiating point if you explain what's important to you, and what you can afford for terms up front. Honour your terms.

Make sure you also have available cash when it doesn't go as expected.

BTW Also make sure you have a decent credit controller/ accounts receivable officer, who can be pushy if need be. Generally accounting staff can be very happy to make payments on time, the number who will "disturb" or "chase" late payers is much fewer, particularly when you add in Thai cultural factors.

Cheers

Fletch

Edited January 7, 2015 by fletchsmile

[bkkuberdude]

Thank you for sharing the great info! Thanks Sandyf, Fletch!

We cannot apply the 30%, 30%, 30% & 10% for our services. That's not the norm in what we provide.

Fletch , How can I check the companies credit worthiness/ability to pay?

I did like to add that there are 2 stages before we receive cash.

stage 1) Local Purchasing Order lpos has to be released. Stage 2) is waiting for the lpos to be paid for.

We were promised LPOS would be released within 3 days after delivering our services. While payment for those lpos would take 2 weeks.

Since August, initially lpos were released at about a week on average after delivering our services, they've now since December taken upto a 25 - 30 days to release lpos (longest so far). Then we have got to wait another 2-3 weeks for lpos to be processed for payment. But we have at times gotten payment after 1 week of lpos release.

I don't quite understand their payment cycle as its never stable. We do call them. We have a good relationship with one of their mid level manager. He said that top management was changing in December and then there are Christmas and New Years, and hence things are being processed slower than usual. I expect things to start kicking by now.

Sometimes they pay on time, sometimes not. But this looks like its going to be the worst. Most lpos for December upto now has not been released yet.

One thing I thought was sure was that they pay. But "when they pay" is upto their discretion. But now I wonder if what I initially thought was true.

Getting to the point to start working for these companies was a huge challenge. We'll try to put some credit control in place. I am sure if they want to pay on time, they can. Maybe there is just that one thing I'm missing; that I'm not doing right, which will get them to pay on time.

We got the relationships done. We got the incentives done . Perhaps a little fear?

To mitigate risks we are in the process of starting to work for a second company hopefully by this week, so we don't put all our eggs in one basket.

Thank you for the answers.

My humblest regards.

Edited January 7, 2015 by bkkuberdude

[thailandusauk]

Can you explain why these big companies do not pay immediately ?

They have enough cash, so why asking smaller companies to wait ?

Because they can ?

[Balance]

When my U.S. company was in it high growth phase, we used a factoring company for a short time. We simply sent the invoice to the factor and got paid in 5 days. It was expensive, but we had high gross margins and so could afford it for the time we needed the AR more liquid. I do not know if these services exist in Thailand.

[keeniau96]

In the USA the historical billing practice has long been "2-10 net 30", meaning a 2% discount if invoice is paid within 10 days of submittal else full payment of invoice is due 30 days from submittal. Many companies will try to game this practice just because they can. The worst is the US government, with six months wait for payment or more being very common.

[bkkuberdude]

Wow, I actually thought the US government would pay up quicker than anyone else. haha.

I have a friend in Dubai that used to deal with the United States army concerning Afghanistan. He made alot of money. Perhaps 2 million dollars in a few years. But the poor chap lost most of it through mal-investments.

Banks around the world normally do invoice discounting.

Thanks for sharing guys. I really appreciate it.

Edited January 8, 2015 by bkkuberdude