3.4 Management of Working Capital 49- The share of customers paying on or before due date is larger in the Nordic
countries than in sourthern Europe. - After the due date, customers still pay faster in the Nordic countries than in
southern Europe. - The extension of credit is safer in OECD countries than other countries.
- The firm should use a letter of credit or require advance payment in developing
countries.
There are differences in payment practices in individual Member States (see also
Volume II). Payments are typically made: within 30–60 days in the UK, the Neth-
erlands, Germany and Belgium;^109 within 60–90 days in Italy, Spain and France;
and within 90–120 days in Portugal. Payments are made faster and more reliably
in the Nordic countries.
The firm can expect some correlation between counterparty credit risk and the
level of “sleaze” in the customer’s home country (see Volume II). A bad ranking
in the Transparency International corruption index indicates that the customer’s
country risk is high and that the firm may need to require advance payment or an
irrevocable letter of credit.
Usual payment terms include: open-account trading with an agreed payment
period; the simultanenous exchange of goods for money (cash on delivery); the
simultaneous exchange of documents controlling the disposition of the goods for
money (cash against documents); and advance payment.
Open-account trading is widely used for trade between western European coun-
tries. The supplier agrees to open-account trading, if it is confident that the risk of
not being paid is small.^110
The simultaneous exchange of goods for money is typically used in mass trans-
actions such as consumer sales and generally where the seller can hand the goods
over to the buyer.
Where the goods are shipped to the customer, the method of cash against
documents can be used instead. Cash against documents is used in particular
where the goods are sold to a business customer and the goods are commodities
that can just as easily be sold to another customer if one customer fails to pay.
It is characteristic of the cash against documents term that banks are used as in-
termediaries (for the mitigation of credit risk in trade finance, see Volume II).
In documentary collection, the supplier retains control of the goods by not handing over the
transport documents (for example, the bill of lading) until the buyer pays (documents
against payment, D/P) or obliges itself to pay by accepting a bill of exchange (documents
against acceptance, D/A).^111 Documentary collection requires a certain degree of trust, be-
cause the goods will already have been shipped to the buyer before it becomes clear
whether the buyer will actually pay.
(^109) See Dun & Bradstreet, Payments Performance (2003).
(^110) Cranston R, Principles of Banking Law. Second Edition. OUP, Oxford (2002) p 377.
(^111) Ibid, p 377.