Payments From Questionable Clients

Payments From Questionable Clients

I remember a comment from an old Russian General about doing business. He said,

“I was not trained in modern management with motivational inducements, or in modern financial management and payment systems. I was trained as a soldier. If you did not due what I said, you were punished – immediately. The punishment choices included demotions, very harsh prisons, or worse. So now for me a regular business transaction is when I meet Sergey under the bridge – I bring the cash and he brings the diamonds. A complicated transaction – is when there is more than one bridge!”

So how do we do business when the issue of payment is the issue? Do you pay in advance only to be cheated with a failed delivery, or do you deliver the product only to become a creditor. More critically what do you do if both parties absolutely distrust one another?

Well lest begin with some simple steps – nearly almost always over looked.

  1. Be specific about what you want and when and where it is to be delivered for payment. If you are buying used vans, you need to be specific about color, miles, model, year, engine size, body condition, etc… You must be specific in exhaustive detail to insure the item desired and supplied are as close to the same as commercially acceptable.
  2. Inspection before shipment is a must. The customer must be allowed to inspect the goods prior to shipment. This is the time when both parties have to come back to the list developed as part of the order when the order was placed and accepted. Any discrepancies must be addressed here and now.
  3. When is the payment due? Are the goods to be paid upon shipment from the factory or upon delivery to the customer? If the payment is paid upon leaving the factory – then the shipping must be the responsibility of the customer. If the payment is to be upon delivery to the customer’s place of business – the shipping should be the responsibility of the manufacturer. In either case, where high valued goods are being shipped – one must find an acceptable and experienced shipper and insure the shipment against damage.

Methods of payment are as important as dealing with the goods. There are many methods of payment available – the method is what is acceptable to the parties and supportive of the designed transaction process.

  1. Cash in a brief case delivered upon acceptance of goods. If it sounds silly – there are still many businesses that have to operate in cash, as the risk of a failed payment is too high. This is especially true where the margin is small the transaction volume is low and the risk of default could be catastrophic for the seller. This is often how diamonds are bought and sold – the buyer and seller come to a room and the buyer selects the stones, they come to a price and the cash is delivered.
  2. There is a similar version to the cash exchange. This is where both the buyer and seller have accounts at the same bank. Once the seller accepts the goods the banker is instructed to transfer the funds from the seller’s to the buyer’s account.
  3. For more regular transactions – the use of bank Letters of Credit to guarantee. Letters of Credit are issued between a buyer’s bank and a seller’s bank. The function of a Letter of Credit is guarantee payment – based upon the terms of the Letter of Credit. There are many traditions in the use of Letters of Credit – and its best to be advised that one uses well established banks for the issuance and acceptance of those letters of credit.
  4. Private 3rd Party escrow is another choice. There is when the order is placed the funds are placed in the hands of a third party only to be released to the seller upon acceptable delivery. An escrow is a common tool for buying property and companies. The terms of the escrow are up to the parties. The holder of the funds and escrow agents do not have to be the same – but I recommend that they be the same. Typically escrow agents include banks, lawyers and trust companies.
  5. Partial payments are also a method for both parties to become committed to the purchase. Even if the seller requires a small amount down – it shows that the buyer is willing to buy and is not a “tire kicker”. However, before a partial payment is made – all the terms of the transaction should be agreed upon and the partial payments along with the buyer’s written acceptance of the terms can be used as the full acceptance of the agreement.

Disputes to even the best agreements arise. It is always wise to choose a method of dispute resolution in advance. There is the choice of law of a state or a country, there is international arbitration – which may or may not be acceptable in one or more of the countries embodied in the transaction. But the parties can appoint a trusted or at least neutral 3rd party in advance to administer to any disputes. The 3rd party should be paid to be available for the agreement and both parties should pay the 3rd party – in advance equally – to administer any dispute.

There are many ways to structure an agreement between two parties where authenticity can be brought to the transaction without the need of either part to trust each other.

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