Posted by Author: Florian Wierzchowski
When you run a business, you establish relationships with many market participants. You sell products and services, but you also buy them. Sometimes you enter into long-term cooperation contracts that shape complex mutual obligations. Does it matter who you sell to and who you buy from? Is it relevant with whom you enter into cooperation? It’s even very relevant in most cases, and in the next few sentences I’ll explain why.
Let’s first assume that your perspective is that of the seller of a certain tangible good or service. We will discuss the buyer’s perspective further on. If all your sales are aimed at the consumer market and made for cash, and you do not intend to change this business model, then you can skip this section of the article. However, if you sell anything or intend to sell on a deferred payment basis, on so-called trade credit, then it is essential to read on. Commonly referred to as trade credit, this is nothing more than an obligation on your counterparty to pay you what you owe in the future for a good or service you sold to your counterparty in the past. It is a situation where the release of goods and acceptance of payment do not occur simultaneously. Being a seller in such a situation, you issue a good, perform a service and count on the counterparty to pay. And you don’t want to miscalculate, you want him not only to pay you on the agreed date, but to pay at all.
Before we get to solutions I will present perspective two. Why should you as a buyer be interested in the financial health of the seller? Firstly – sometimes as a buyer you pay in advance – you make online transfers for advances or deposits without yet receiving the goods or services. As in the paragraph above, there is no simultaneous delivery of the goods/service to yourself and payment. You are counting on the goods or service being delivered to you and you do not want to get overcharged. In addition, there is another situation in which you, as the buyer, should be interested in the financial standing of the seller – when you buy a product or service and you want the guarantee provided for it to be fulfilled if necessary, or the service, modification or expansion possibilities of the product to exist in the future. This can only be the case if the counterparty is stable and not threatened with liquidation. If the manufacturer withdraws from the market after just six months, who will you go to with your warranty claims? What good is an expensive finance and accounting or ERP system if the manufacturer goes out of business and fails to update or modify the software to suit your needs?
The situation is similar with complex contracts, which may be settled over specific periods of time. In complex contracts, you can act in both roles – as buyer and seller. Then there are issues such as discounts, warranties, defects, insurance, returns, indemnities and much more. Here you probably also want peace of mind that everything you are entitled to will be accounted for.
Therefore, so that you do not miscalculate in your counting on luck, you should help luck and do your due diligence and at least investigate the counterparty’s picture before entering into such potentially risky business relationships. You will find out how this can be done in the next part of the article, which will soon be made available on our blog.