Food & Beverage Update: Don’t Get Burned
13 September 2018
Irish employers’ group, IBEC maintains that more than eight out of ten food and drink companies fear Brexit’s impact but are better prepared for the UK’s departure on 29 March 2019 than other businesses. Geopolitical and economic challenges and pressures aside, the importance of good credit management practices to prevent serious financial loss is something that every food and beverage business should be constantly aware of.
Like cooking, start with the basics!
To that end, the basics of good credit management and in particular getting to know a customer before any significant amount of credit is extended to it, is crucial. Whenever a business in the food and beverage sector takes on a new customer it should use a detailed credit application form completed and carry out basic checks as to the financial and commercial status of the customer. It should carry out credit checks for potential customers together with seeking permission to obtain references from other suppliers.
Then add terms and conditions!
A lawyer will always advise suppliers of goods that they should agree a contractual framework with a new customer before credit is extended to it. Suppliers should also try to get written acceptance of their terms and conditions and, of course, these terms should be specific to certain nuances within the food sector. For example, in relation to liability clauses, the perishable nature of many foodstuffs means that the risk of loss or damage in transit, and whether it is buyer or seller who is liable, needs to be carefully considered. These are especially important when transport of goods is being outsourced. In addition, every business providing credit to the sector should have an effective credit management policy, of which its employees, particularly those in sales, should be well aware.
But remember that time is of the essence!
Given that products supplied in this sector generally have a very short shelf life, employing ways and means of obtaining early payment are crucial. Therefore, it is advisable that new customers are only extended credit to a certain agreed limit. Once this limit is reached, further goods or services cannot be provided until the customer clears their account.
As a general rule, business-to-business transactions must be paid within 30 days, although the terms may be extended to 60 days by contract. However, in the food and beverage industry, shorter payment periods are not uncommon. Indeed in many cases, particularly where the supplier is dealing with new customers, these may well prove essential.
A suppliers should also have a stop policy. This would be employed to cease supply immediately when payment is not made by a due date, or within the agreed time thereafter. Stop policies are absolutely critical in an industry involving perishable goods.
Beware copying another chef’s work though!
Some of the other bread and butter terms like those which protect the supplier/creditor’s title in the goods are often not that effective in the food industry. Retention of title clauses in a contract are aimed at preserving ownership over goods until the related invoice is paid in full. The effectiveness of these terms are usually most prevalent in insolvency situations, where a supplier enforces his retention of title clause against a liquidator. This ensures that the supplier can take back his goods rather than have them fall into the proceeds of the liquidation.
However, for this to be achieved it is essential that the goods can be traced, retrieved and identified distinctly. Obviously, goods provided by food suppliers may frequently have to go through a transformation process which may render the retention of title clause redundant. So, given that a retention of title clause may not ultimately be effective for food produce creditors, it is all the more important that the more basic contractual elements around ensuring prompt or early repayment of credit be relied on by businesses supplying credit to the food and beverage sector.
For further information on the importance of good credit management for your business, contact a member of our Debt Recovery or Food, Beverage & Agriculture teams.
The content of this article is provided for information purposes only and does not constitute legal or other advice.