Effects of Late or Non-payments/Impact of Nonpayment
Impact of NonpaymentEdit
What happens if the credit information that is available indicates the buyer is credit-worthy but the buyer still defaults? The impact of nonpayment or true cost of credit in international business is almost invariably greater than it appears. There are four types of impacts associated with nonpayment, over and beyond the impact to sales:
1. bad-debt (loss)
2. lost interest
3. opportunity costs (alternative use of capital)
4. administrative (chasing the reluctant debtor)
Margins, or profits, on export trade are low to begin with and are constantly under attack because often there are more competitors in a global market than in a local market. In many countries, payment delays are expected, so that a credit manager needs to contend with “credit taken” as well as credit extended.
The focus of this module has been the concept of extending credit. The next step is to discuss an expanded version of credit extended called “credit taken.” An example of credit taken is as follows:
- Buyer XZY is given a line of credit of $100,000 and expected to pay in 30 days. On the 25th day, the buyer asks the seller to approve another order for $100,000, meaning that on the 25th of the month, the credit extended is $200,000. The seller agrees because the buyer commits to make payment for the first $100,000 on the 30th of the month. However, the buyer reneges on this promise so that the seller is owed more than the original agreed-upon credit line.
The chances of nonpayment are always possible, which means the costs associated with nonpayment always take a toll on the profit.