Benefits of a Letter of Credit

Sadie Keljikian, Top Billion Finance

If you import goods, your suppliers probably require that you provide a deposit when you place an order. Suppliers usually request this for two primary reasons: (a) by getting an upfront deposit, the buyer is less likely to default on the remainder of the balance owed because the buyer would lose their deposit; (b) cash flow – the supplier needs funds to produce the goods and deposits are essentially interest free cash. Unfortunately for importers and wholesalers, deposits tie up and divert cash from day to day operations and other revenue generating or expansion oriented uses.

There are a few ways to avoid leaving substantial deposits or tying up cash to start production. First, you can minimize the size of your orders to avoid depleting your cash flow, but that would inhibit your growth. Big-box retailers generally place very large orders and offer significant opportunities to growing import businesses, so unless you find a way to accommodate these larger orders, it will be hard for you to attract big buyers. You can stagger orders so you don’t have to pay for everything all at once, but at some point, if you want to make substantial sales, you will have to find a way to finance large orders.

Another option to mitigate the burden of tying up cash for production upfront is to negotiate better terms with your supplier. If your company is large or you have a good history and/or trusted relationship with your supplier, you may be able to obtain goods on credit.  If you can get this option, use it.

A third option, if you want to take on larger orders and cannot obtain terms without leaving a deposit, is to offer your supplier a commercial Letter of Credit (“LC”) instead of a deposit. This gives your supplier a bank guarantee, which is an asset they can often use to obtain funding directly from their bank.

How do Letters of Credit work?

A letter of credit is a conditional assurance of payment provided to the supplier’s bank when the importer places an order. The LC is issued by a bank or financial institution on behalf of the buyer/importer and eliminates the need for a deposit by ensuring that both sides respect the conditions of the transaction.

Both parties benefit from an LC. The supplier becomes the beneficiary of a financial instrument they can use as collateral to obtain funding. They also obtain a bank guarantee of payment in addition to the buyer’s promise to pay for goods if all obligations are fulfilled. The buyer avoids the risk of tying up funds overseas and gets better control over the transaction. If the buyer uses a third-party provider, they can even obtain an LC without typing up collateral or cash lines with their own bank or financial institution.[1]

A commercial LC gives buyers comprehensive control over their importing process. It covers the cost of the goods themselves as well as shipping costs, allowing purchasers to keep their money until the goods are approved and shipped. While an LC may add to transaction costs, it grants the purchaser more control and more capital flexibility while giving the supplier more cash flow and some assurance of full payment.

Letters of credit benefit both the buyer and the supplier.

A letter of credit also serves as a layer of protection to ensure that you don’t waste time and money on an order that may not reach you on time or as expected. While your agreement with the supplier provides some degree of assurance that you won’t be left without your goods or money, there are no guarantees. Depending on the supplier, you may find yourself with faulty, defective, incomplete or late orders. Untrustworthy vendors can compound the issue by keeping your deposit regardless of their errors or inability to complete the orders as agreed. Without an LC, buyers can still take legal action against their supplier, but justice is uncertain and costly, particularly if the supplier is in another country.

In contrast, an LC requires collection of documents proving that the order is as expected and sent on time before the bank releases any payments to the supplier. The bank is basically acting as an escrow agent to ensure compliance by all interested parties. Thus, importers purchasing inventory overseas never need to worry about lost working capital due to failed or incomplete orders, and suppliers can still obtain the cash flow they need without burdening their customers.

Interested in discussing Letters of Credit or other trade financing and supply chain management solutions further?  Speak to one of our specialists.

One of the most important, often hard-won lessons is how to protect one’s self and one’s assets in transactional proceedings. Letters of credit are a safe, simple way to protect yourself and your purchase, especially in the case of international import/export agreements. You and your vendor are legally and financially protected, so you can even place orders from less-than-trustworthy vendors with confidence.

[1] Top Billion Finance specializes in issuing LCs on behalf of client without requiring cash collateral or deposits. We tie up and freeze our own lines on behalf of qualified clients undertaking verified commercial trade transactions.

Collecting on Tough Accounts

Sadie Keljikian, Top Billion Finance

Selling goods or services on open terms is a mixed bag. On one hand, open terms can attract more volume and bigger customers with the potential to accelerate your growth and increase revenues. On the other hand, allowing customers to pay later diminishes your cash flow and creates the risk of payment default.

Here are a few ways to protect yourself against delayed payments and handle tough customers:

Structure your payment terms carefully upfront.

The best way to avoid payment default is to carefully structure the terms of your relationship. You should perform credit checks on new customers before offering terms. If you can’t, at least ask for credit references to get an idea of that customer’s bill-paying habits. Use the information you gather to determine proper payment terms. For example, if a customer tends to pay late, you may want to take a deposit upfront, or include late payment terms or early payment discounts to offer incentive for timely payment. If a customer has a history of stiffing vendors and engaging in unethical practices, perhaps you should not offer payment terms at all and instead demand payment upon delivery or only deliver small quantities. Conversely, if a customer has good credit, you can offer terms and rest assured that they’ll pay.

As a recap, if you’re concerned about poor payment habits, include provisions in your customer’s contract indicating that you will charge interest on past-due invoices and update their payment terms if their payments are habitually late. If a customer is particularly problematic, require cash on delivery, or “COD”, rather than open terms.  Follow through on these penalties diligently. Mistakes happen, but imposing and enforcing a financial penalty on late payments and controlling your customer’s access to open terms gives you more leverage to collect.

Invoice punctually and consistently.

When feasible, invoice your customer for each shipment. Some vendors choose to bundle multiple shipments and transactions into one invoice periodically (i.e. weekly or monthly) to avoid large quantities of small invoices. However, combining transactions can cause problems when you’re collecting.

One such problem arises if a customer doesn’t communicate or place a re-order after their initial purchase. Because they aren’t invoiced immediately, they may forget or be difficult to contact for collections. Unfortunately, customers will sometimes dispute charges that they may or may not remember, which will further slow up your processes and potentially cause legal difficulties.

For these reasons, it is good practice to consistently and immediately invoice your customers each time you fulfill a customer’s purchase order. Once the goods are delivered or the service is rendered, invoice your customer soon thereafter to ensure that your records are accurate and that you’re always paid.

Follow up regularly and without apologies.

Following up with customers on past-due bills is uncomfortable.  There’s no denying it. However, if you are polite, professional, and follow up as a matter of course, collecting can be just a part of the process, rather than a cause for confrontation.  Another way to avoid bad blood is to outsource your collections to companies like factors who specialize in collections. By having a third party collect your invoices, you can be the good guy while your factor or collections agency does the dirty work for you.

When managing your collections process yourself, you should automatically check in with your customers as soon as a payment becomes past due. Always approach the situation logically and professionally and be firm, but avoid a “bad cop” attitude. Mistakes happen and your customer may not be aware that their payment is past due or there may be other legitimate reasons why they haven’t paid yet.

Whether it’s you or a third party (e.g. factor) collecting your invoices, be ready to enforce the terms and press the issue without apology. Although you may feel like the bad guy, you are ultimately creating an environment in which you and your customer can build a healthy relationship. Enforcing obligations re-enforces expectations and even helps your customers avoid interest charges and bad credit.

Keep careful records of all interactions, invoices and amounts in question in case your customer is confused and/or attempts to dispute payment. For example, if your customer wants a proof of delivery, you should have it filed next to your invoice. Since it is their niche, professional third collectors and factors are particularly adept at keeping records at making sure documentation is in order.

Stay involved and keep tabs on past due payments.

Some customers are tricky. They may tell you there’s a check in the mail or that they’re sending it today, when in fact, they are perpetually late with payments and often lying. These kinds of customers require a particularly shrewd approach. If they are local to you, offer to send a courier to pick up payment rather than have the customer send it in the mail. If not, consider selling to them exclusively on COD terms or requiring them to pay you via credit card to avoid delays. Get creative. There’s no limit to how you can structure transactions, communicate with your customers, and otherwise effect collections.

Third Party Outsourcing.

As described above, using a third party to provide collections has many advantages. Collection agencies are resourceful when it comes to particularly slippery customers, but their services can be expensive. Many wholesalers prefer to use factoring, since the “bang for your buck” is more substantial. Factors typically buy invoices from you at 80% of their face value, collect from your customers, and then pay you the remainder of your invoices’ value, less factoring fees (typically 1-3% of the full amount). So, for a relatively low cost, you receive your funds immediately and your factor takes full responsibility for your collections process.

If you’re new to this, it may take you some time to find your own approach. Always remember to be friendly, but firm. As mentioned, these interactions can be uncomfortable, but you can make the best of it in how you choose to frame and approach it. The more you systemize your collections process, the easier future interactions will be for you and your customers.

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Boosting Sales – Tips to Grow Your Wholesale Business

Sadie Keljikian, Top Billion Finance

For wholesalers, selling to retail customers can be a complex and strenuous process. Unlike consumers, retailers need to be convinced not only of quality and usefulness, but of the uniqueness and longevity of a product in order to feel compelled to devote precious floor or shelf space to it.

Here are some tips to help you boost sales and grow your business.

Monitor your business practices.

Before you can think about adopting dynamic sales practices, you need to make sure that your
business and its reputation doesn’t raise any red flags for potential customers.

  • Create a solid web presence.

When you initiate contact with a retailer, they will usually search for your business online immediately and go from there. Make sure your website looks professional. If you are unable to afford upscale web design, keep things simple and straightforward. Offer as much exciting information about your business as possible (without giving up trade secrets of course). If you are honest and don’t oversell yourself or your product, you will engender confidence and trust right off the bat. Solicit feedback on your site from employees and clients, and constantly strive to produce and publish good, relevant content on your site while continuing to adapt and improve it.

If there are any poor reviews or scandalous details (i.e. a lawsuit) to be found in searching for your company online, be honest with your prospects when it comes up. By controlling how you choose to frame the story and admitting places where you may have erred and have now improved, you can enhance your credibility with prospective client. Discussing how you previously confronted a difficult situation with a client offers an opportunity to demonstrate the character and integrity of your company.

  • Update and Monitor Social Media

If you choose to use social media as a marketing platform, be very careful. Social media is a rich resource, but must be handled carefully so that it doesn’t become more of a hindrance than a help. To the extent possible (and practical), do not allow access to your company’s social media accounts to anyone untrustworthy and be sure that the content remains consistently professional and relevant to your business. You should limit or completely avoid silly or irrelevant photos and shared links and monitor copy frequently for any potentially offensive or inappropriate phrasing.

  • Manage all interactions with prospective clients.

Everything that applies to your business’s web presence can be applied to any in-person contact in which you or your colleagues engage. Be friendly, informative and honest about your business and how it operates. Make sure any sales staff are not only good at selling, but knowledgeable, personable and socially apt enough to lead pleasant and helpful interactions with all prospects. Find a proper balance between driving your sales force and allowing for individual styles and tactics from different team members. If your incentive structure is sound, sales people will be motivated to do their best and will naturally use all their strengths and capacity to get the job done.

Generate leads.

Building your customer base requires patience and focus. Before you can sell to new customers, you need to identify potential customers by casting a wide net. Then, narrow down your market and develop a good rapport with those who show significant interest. Here are a few ways to find leads:

  • Research competitors.

This is step one in the sale process. If you aren’t sure how best to sell your product, it’s a great idea to look at the sales and advertising techniques of your top competitors. See what their websites look like, find out what networking events they attend, and look at as many marketing materials for your industry as possible. If you research a variety of competitors, chances are you’ll find a combination of tactics perfectly suited to you and your business.

  • Attend trade shows.

One of the best ways to find potential retail customers is to attend a trade show. A lot of businesses are inclined to devote all, or the vast majority of their resources to their web presence. While a good website and digital marketing campaign are important, they are not the be-all, end-all of sales. Boots on the ground and hustle might be old school but they’re far from obsolete. Until the machines take over, direct human interactions are still our primary mode of communication and the cornerstone of any good sales strategy. Never underestimate the power of pounding the pavement in an age when more and more people like to meet (and hide behind) the safety and ambiguity of the internet.

Trade shows are beneficial for a number of reasons. First, you will meet a huge number of potential customers in person, allowing you to show the personal, friendly side of your business to a larger pool of retailers than you would generally be able to access. Second, it is an excellent opportunity for you to flex your sales skills and improve your pitch, which prepares you for cold calls and other sales situations.

Exhibiting at a trade show is expensive. Between the exhibitor fees, promotional materials, and travel costs, the total price can add up. However, if you present yourself professionally, get buyers excited about your product, and follow up with interested parties diligently, the benefits will vastly outweigh the costs. In the beginning, you’re just building your database and getting your feet wet while getting a better sense of the market. Don’t expect miracles – this is a marathon, not a sprint, so be patient and don’t be discouraged if substantial sales don’t materialize right away.  It takes persistence, hustle, and grit so stay on top of your contacts, listen to them, and use those insights to improve and refine your product and your pitch.

  • Make phone calls.

Depending on your product, you may find that cold calling is a good resource for generating clients. If that is the case, it is vital that you keep your call volume as high as possible. Obviously, cold calling is, like any aggressive sales approach, a gamble. So, don’t be discouraged if only a small percentage of your cold calls actually lead to sales. This is why high volumes are so important to the success of a phone campaign.

There are many ways to obtain suitable calling lists. You can buy lists from sellers who provide contact information of c-level executives. Many sellers offer their contact information online. You can develop contacts with lead generation websites that specialize in sourcing deals. The best call lists, however, are generated when you do the research yourself or exchange cards or information in person. Such leads are technically “warm leads” that require “warm calls.” If you have had some prior contact or have a reason to call aside from having bought the contact from a list vendor, your chances of making a connection (and sale) improve substantially. Try all methods and see which ones work best for you.

  • Use LinkedIn.

Another way to develop leads is to use a site like LinkedIn. Unlike other social media platforms, LinkedIn organizes users by industry, position, and location. This means that it can be used to both generate leads and pursue existing prospects. Although LinkedIn is currently the largest network of its kind for professionals, there are others that may be worth considering as well, so do your research and find the best platform for your field.

Keep in touch.

Once you’ve generated some leads, make sure you keep in touch with them. Chances are, they’ve got several vendors vying for their business, particularly if you met them at a trade show. Frequency of contact is a balancing act. You want to check in regularly so that your prospect doesn’t forget you or your products, but you don’t want to contact them so frequently that you appear desperate and aggravate them. Use your judgement and do your best to maintain a presence on their radar without becoming an annoyance.

Here are a few tips to optimize your ongoing contact with prospects:

  • Target the prospects you pursue carefully.

The fact of the matter is, a lot of the prospects you find will not be interested in your product. Whatever the reason, this means that you should be sensitive to the level of interest a prospect will show you and choose the prospects you pursue with care. If you meet the person at a trade show, gauge their reaction as you speak to them. Get a sense of their business: is your product a good fit for them? Will you fill a niche that is otherwise unoccupied? If not, are you offering a noticeably improved version of a product they already offer? Does the buyer show enthusiasm for your product(s)?

Once you’ve considered all of these factors, adapt your behavior in pursuing the prospect accordingly.  Find what they’re looking for and see how you and your product can help them achieve their aims.   If you’re not sure about their level of interest, reach out to check in occasionally and don’t be afraid to simply ask. Ask for feedback on your process so you can improve. Assure your prospects that you want to help them, not bother them.

  • Map out and streamline your sales process.

Once you’ve figured out how to navigate your relationship with the prospect, create a game plan for your ongoing contact with them and stick to it. Create small, attainable goals and set deadlines to ensure that you don’t waste too much time on any one prospect, nor let any fall by the wayside.

As you keep in contact, it is also a good idea to create a list of bullet points before you have a phone call. That way, you’ll avoid getting sidetracked even if the prospect has questions that may not relate to your planned discussion.

  • Be appreciative.

As you keep in contact, be appreciative. Buyers usually have to thoroughly research every potential vendor and run logistical and budgetary concerns by their superiors. In other words, if they keep in touch and plan to become a customer, you should understand that it may take some time and thank them for whatever time they are able to devote to your pitch. It’s also a good idea to stay positive. People (including buyers) generally respond better to people who are friendly and flexible. Plus, if you adopt a negative mindset, you will quickly get discouraged when buyers are unresponsive or don’t immediately give the responses you want.

  • Believe in your product.

You are the lens through which the prospect sees both the business and the product. When the person making the sale genuinely believes in what they are selling, not only is the prospect more interested in the product, they are more interested in doing business with a that person. individual touches like this may seem fleeting and inconsequential, but they can mean the difference between a dud and a sale.

Ultimately, experience will inform your sales techniques and some trial and error is necessary to find your best methods. Stay informed, watch trends in your industry, and don’t be afraid to cast a wide net from time to time. Keep going and eventually, your efforts will be handsomely rewarded.

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Selling on Open Terms

Sadie Keljikian, Top Billion Finance

When it comes to trade, wholesalers often have a considerable number of potential issues to confront. They need to account for manufacturing and shipping costs, logistical concerns, control the quality of their products, maintain good relationships with their customers, and ensure that they receive payment for every invoice. When selling goods to retailers, one of the more complex negotiations surrounds how and when the customer will pay, or the agreed payment terms.

Depending on the vendor and the customer, they will come to one of a variety of agreements. Generally, when the customer has reasonably good credit and/or a solid relationship with the vendor, they will prefer to use open terms. Open terms on an invoice mean that the customer has a particular time frame in which to pay, beginning on the invoice date. Some common terms are Net 7 (meaning payment is due 7 days from the invoice date), Net 10, Net 30 and so on up to Net 90.

An account with open payment terms is ideal for the customer, since they don’t have to pay until after they receive the order. This means that they can place large inventory orders regardless of cash flow and pay when they receive the order as expected. For vendors, however, selling on open terms can be a double-edged sword.

On the favorable side, selling on open terms can offer a competitive edge to vendors who find themselves struggling to gain new business, since most customers prefer to have an open account with their vendors. In addition, when customers buy on open terms, they tend to place larger orders than they would under COD (cash on delivery) or similar terms. If customers don’t pay on time, they will accrue interest and/or late fees on the past-due invoices, which means more revenue for the vendor when they eventually receive payment.

Less favorably, sales on open terms can be risky when made to customers who aren’t as trustworthy. There is no guarantee that the vendor receive payment on time or even reasonably close to the due date. If too many customers are delinquent in their payments for too long, the effect on the vendor’s revenue can be devastating. This is why many vendors who sell on open terms choose to factor their invoices, to provide a layer of protection for themselves and their open invoices.

If you decide to sell on open terms and are concerned that your customers may not pay on time or at all, factoring is an excellent solution. Non-recourse factoring protects businesses if their customers declare bankruptcy or are otherwise rendered insolvent. In non-recourse factoring agreements, the factor absorbs the risk of all invoices they purchase from you.

Open payment terms can be tricky to negotiate at first, but are an excellent option, provided that the right systems are in place. Vendors must keep track of their cash flow, whether that means carefully timing orders to ensure that payments supplement any deficiencies or, as mentioned, factoring your receivables. Overall, open accounts create a system that allows vendors to expand their client base immensely and keeps customers happy by allowing them ample time to pay.

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