It’s fun to talk about brand building and entry into foreign markets. Shipments are great, but getting paid on time is the most critical element with your distributor partnerships. Financial issues can disrupt a business relationship quickly. Unfortunately, many situations are “out of the distributors control” and related to overall country practices versus a distributor policy.
Credit terms are a normal part of the “factory to consumer” supply chain. In export markets, it’s often at least a six month cycle from the time of production to payment by the consumer at a supermarket cash register followed by retailer repayment to your distributor. In an ideal world, credit terms from a brand owner to their distributor and from the distributor to the retailer should insure that no one party assumes a disproportionate share of the financing of inventory through the supply chain. Terms vary widely, by country, category, and size of the brand. Read our Ten Tips: Credit Terms What’s Fair ?
1. Established Distributor vs. New Customer
Large distributors with long histories of success building brands of multinationals are typically credit worthy. Exhibit caution in extending credit to small distributors or those based in high risk countries . Request advance payment until a track record can be established.
2. Leading Brand – vs. Niche Player
High rotation brands represent “cash” to retailers. Retailers that turn their inventory more than 15 times per year generate positive cash flow . They selling high velocity brands before the 30-45 day invoice is due to be paid. On Millions or Billions of retail sales, this can translate to an important gain. On the other hand, a niche brand that sells slowly represents a “cash hog”. Frequently, a retailer may need to pay the distributors invoice for the minor brand prior to consumer sale, absorbing cash resources. This is the rationale for distributors of niche products or new products to request terms of 60-120 days .
3.Different Categories- Different Terms
No surprise that benchmarks vary widely by category. Produce and Dairy distributors are often paid quickly, due to the short shelf life of their products. Non- Food categories such as “Mops and Brooms” have longer terms, as distributors may only sell a few units per store, per year. A general rule is “the higher the brand turnover, the shorter the payment terms”.
4.Standard Terms – “Lots of Variables”
There is a wide range of distributor credit terms and no global standard.
Below is an attempt to provide some general guidelines.
30 Day Terms – Billion Dollar Multinationals, Top Ten Local Brands, “Fresh” products
60 Day Terms – Typical terms for mid size international “grocery/confectionery” products
90 Day Terms – More common for Niche brands,OTC or Personal care products
120 Day + Terms- Slow movers, General Merchandise, Seasonal Brands
5. Exceptions: Seasonal Categories
Seasonal categories such as Holiday confectionery or sun protection have extended payment terms.
Frequently there is a financial incentive for “early buy or inventory build” and payment due “after the season” or holiday period is over. This practice results in extended terms of 120 -160 days for the retailer and similar terms ( or split, sequenced, invoices) for the distributor.
6.Policy: Date of Invoice: Port Arrival, Bill of Lading date ?
Another key input is the policy on the actual date of your invoice to the distributor.
Some brands begin the terms from Shipment date and others based upon arrival in the port.
In cases, where sea freight and customs clearance requires two- four weeks, this creates a big difference.
7. Extended Terms Incentive
A distributor may request longer payment terms with a new principal or brand. This appears as a reasonable request. The initial new product launch cycle may take six months or more time to secure key account listings, merchandise the brand on the shelf, and begin consumer marketing. My guidance is to establish standard payment terms , such as 60 days, but to offer an additional 2-4 months extended terms on the “first order only” for new launches.
8. Cash in Advance
A Brand owners favorite credit policy should be “cash in advance”, with discounts for pre-payment. However, a request for cash in advance may be unrealistic in many cases as “distributors are not bankers” with unlimited financial resources. An export managers number one objective is to manage risk and loss of receivables. I am very comfortable of recommending cash in advance policies for risky countries or distributors that appear to be small or with limited credentials.
9. Annual Credit Reports
Many companies make the mistake of doing credit checks only at the start of a new distributor relationship or when they suspect trouble. In many cases, this is too late ! Every exporter should request annual financial statements from all their distributors. March timing is an appropriate window to capture year end results. These distributor supplied reports should be supplemented by independent credit reports from Dun and Bradstreet or Equifax . Get the CFO’s of your company and the Distributor involved to separate the “commercial emotions” from financial reality.
10. Distributor Terms – What’s Fair ?
In reality, terms are just one element in the overall financial negotiation between the brand owner and their distributor. Both parties must also consider distributor margin, marketing investment and brand potential as well as the credit terms to determine the total financial value of the business project and services required. These inputs provide a framework to establish a fair agreement where both parties win. Distributors are in the business of making a fair return on their investment just like you are !