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Terms to include on your Credit Applications & Purchase Orders

Sourcing around the world can generate a lot of paper (unless you use a cloud based system). For small and medium sized companies without legal departments or accountants, it can be difficult to know what information needs to be included on your credit applications and purchase orders.

Sourcing Journal spoke to Bradford Marcus, an account executive at BDO (a division of the Atwell Companies), about what firms can do to get paid on time and grow their business.

SJ: How do people get trapped in bad agreements and bad debts?

BM: In sourcing, they’re great at creating the product and getting it made, but sometimes they’re not so good at the business side. To protect yourself, start by stating precisely what your credit policies are – under what terms will you extend credit, and exactly what your terms are when the applicant has been denied credit cards. Specifically, what do you expect in terms of CODs and deposits, and what recourse do you have if they fail to pay. You should consider adding the following terms:

– No returns without written authorization.
– No returns accepted after X (7-10) days.
– Restocking charge
– Interest charge on past due invoices.
– Should an invoice sent to a collection agency, debtor will be liable for any fees including legal, charged to collect that debt.

Remember, current clients need to be informed of any changes in your credit policy and acknowledge receipt, or they need to fill out a new credit application and sign it.

SJ: Sourcing companies are increasingly being asked to extend credit, especially in North America. What does this look like, and why is it necessary?

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BM: At this point, in North America, you have to extend credit. If you don’t extend credit, the companies who are competing with will look for someone with a similar product and similar price point that will. When people grow businesses in North America very rapidly, it’s based on credit — not solely based on price, not solely based on quality.

SJ: What about purchase order financing? Isn’t that an alternative?

BM: Firms can sometimes do purchase order financing — financing based on having an order in hand. It’s nice because it’s available before any invoices are issued — I go to the organization or factory and they say that they will lend money for the production of those goods. Most of the purchase order financing is for close-to or short-order production.

SJ: Can you tell us about factoring?

BM: Factoring is forwarding money against an invoice, until it gets paid. So if you issued an invoice to someone, to the buyer, you issue it through your factor, who will typically give you 85% or more of the money that’s on that invoice depending on if it is “recourse” or “nonrecourse.” Once the goods have been received POD, they will collect the money on your behalf, and then take out their fee and remit the balance that is due. It’s great in terms of cash flow.

SJ: Could you explain “recourse” and “nonrecourse?”

BM: Depending on what type of factoring or agreements you have, you may have a non-recourse contract, meaning they have no recourse if the buyer doesn’t pay or is difficult to collect from.

SJ: How much does factoring cost?

BM: Generally, a reasonable fee would be 2.5% to 3% of the invoice. Then, some of them will have an additional fee for each invoice. They’re going to make sure they get compensated. The major factors related to the apparel and sourcing industry are CIP, Rosenthal and Rosenthal, and Wells Fargo.

SJ: Most of your work is in collections, right?

BM: We do what’s called first party collections — we act as an accounts receivable department in the United States or North America for foreign companies. They often don’t have the time, money, resources, or knowledge to do it here. It means those foreign companies don’t have to set up an office in the United States. They can just pay the charge per invoice.

SJ: You do cosourcing too. How does it work?

BM: Let’s say you’ve convinced me to extend you credit. Now (1) how do I go about doing it? Then, let’s say I ship the goods — how do I follow up? Is someone going to be calling at 7 o’clock at night? No, of course not. Why bother? It makes more sense, is much better to have someone in the united states handle those phone calls. That’s why India is such a hotbed, because they have so many people willing to work the midnight shift to talk to p[eople on the phone in the united states. If you want to hire someone in India to make the phone calls, you can, but how will they have the resources and the knowledge to make those calls? Why have the unnecessary friction of talking to people in India? It affects credibility. It feels like people are just going through the motions in those phone calls, and it’s hard to develop a relationship. When we do cosourcing, all of our lines are blocked. So people would never know that there’s an independent company calling on the behalf of, for example, Bluefin (a company they actually do it for who is based in Italy.) it’s just a matter of having someone to make those simple calls and have those simple conversations that an accounts receivable department would ordinarily do, but having it done in English, in a proper time zone. We can do this cost effectively, we know your industry we know the problems, we can do it in your language. But it allows people to extend credit — because if you extend credit, you need an accounts receivable department. You need a supporting organization. We can help you do it much more efficiently than you can do it. We deal with some of the largest banks, factors, and companies in the world serving the united states market and north American market. We haven’t looked at how you do outsourcing of marketing, sales, etc. how do we do that? There will need to be a contact at the bottom. There are also companies that will actually buy your recievables the next day if they need the cash. It fucntions sort of like a stock exchange, where the factor acts as an intermediary trying to find something. They are almost exclusively all recourse contracts, so they have to be collectible. They will charge according to what they perceive to be the risk and the time frame.

Bradford Marcus — BDO / Account Executive
The Atwell Companies
The Atwell company is comprised of 3 divisions, I’m an employee of BDO. We do credit work, we’re a credit bureau, which is credit international, and a collection agency. We are an accounts receivable company. We give advice and we help people collect.

516-622-9030 ext 341