With market volatility resurfacing, resulting from concerns over the Greek economy and a slowdown in China, companies have been reminded of the importance of reviewing their payment policies
Experts agree that the question of payments has never been more crucial. They say businesses must go to greater lengths to understand international transactions and the reputation of the firm with which they are doing business.
Roman Itskovich, vice president of Financial Products at Ebury, explains that there are a number of questions corporates should ask before agreeing payment terms.
He says: “Is the firm they are working with making a one-off payment? Is the foreign firm reputable? Does it have non-payment history? Is there a contractual option for non-payment because of sub-standard product quality, or an opt-out clause?
“If a business is particularly concerned about a particular payment, then a payment mechanism, such as letters of credit or guarantees, can be used to ensure the payment is made.”
Letters of credit or guarantees usually involve a third party, typically a bank, guaranteeing the payment upon discussed conditions, greatly reducing the risk of non-payment.
However, if a business is comfortable taking payment from another organisation, then efforts should be made to ensure a payment is completed in the quickest time possible.
Mr Itskovich explains: “They should make sure the buyer is incentivised to prioritise making the payment, ensuring the relationship is strong and the buyer understands a prompt payment can lead to benefits, such as a discount or a faster turnaround time.”
The Chinese renminbi has scope to be one of the key currency influences over coming years
Being paid on time
Risks arising from slow payments, such as currency risk, have been underlined more recently with global markets reacting to macro-economic news.
Claire Bennison, regional director at Brooks Macdonald Asset Management, says: “For UK companies, the key export market is typically close to our shores, namely Europe, so the level of the euro to the pound is a key currency rate. Any speculation, particularly post the initial Greek crisis, that the eurozone could fall apart will be a major event and is a risk that many companies have to consider.
“That said, many of the larger global companies are both operationally and end-user geared to China. Many input costs and much production is undertaken in China, yet this is also becoming one of the main markets for finished goods and services too. Therefore, the Chinese renminbi has scope to be one of the key currency influences over coming years.”
Ms Bennison highlights the recent volatility from China as a reason that firms need to take steps to ensure prompt payment.
“The recent action by the Chinese to allow the renminbi to devalue against the dollar surprised markets, resulting in the biggest two-day fall in value since 1994, and has increased the chances of a currency war and an increase in volatility,” she says. “Further devaluation could also add concerns to businesses looking to hedge or mitigate Chinese currency risk.”