“If I need your money before I can do anything, it makes it look as though there is a chance that delivery may never happen,” he says.īusiness trading on credit has a very long history - agricultural trade was conducted on credit in ancient Babylon more than 3,500 years ago - and there was a good reason for its invention. What kind of message does it send if your firm demands proforma payment? Does it signal that your firm is running low on working capital? Proforma terms send a negative signal to customersĪndy Imrie notes that companies are constantly checking their business partners for signs of stress in this environment. They won’t want to deploy it into their suppliers’ bank accounts.ģ. These companies will need to deploy their cash to trade their way out of trouble. In October, the Bank of England noted that many SMEs are in debt for the first time after taking government support and may struggle to repay. Darren Felsenstein says: "In this climate, if your customers find someone doing the same job as you, who offers them business on credit terms, they will move." And one of the ways they can do that is by making it easier to get service from me than another company down the road."Īlthough many firms are cash-rich, they will still migrate to suppliers who can offer conventional credit terms. Just as you are nervous about their non-payment, your customers are anxious about your non-delivery.Īndy Imrie comments: "There is often a natural crossroads where the supplier has to decide whether they want to grow this customer relationship further. But, from your customer’s point of view, sending £20,000 for a follow-up order in today’s environment feels risky, so order volumes never increase. Your customers may be comfortable with proforma payment for their first £5,000 order - indeed, many businesses insisted on cash terms for new customers even before the pandemic. Proforma trading can choke the natural growth in customer accounts. However, Imrie and his Allianz Trade colleague Darren Felsenstein, a credit insurance consultant, have identified three problems with asking for proforma terms. Andy Imrie, Regional Commercial Manager North & Ireland at Allianz Trade UK, says: "The pandemic has exaggerated the need for a lot of suppliers to be ultra-conservative on how much credit they extend.” Once this is paid, the goods or services will be delivered.Īs UK businesses trade out of the pandemic, it may seem a logical way for a company to protect itself. Typically, a company will issue a proforma invoice to the customer. Proforma trading is where a business demands payment before supplying goods or services. But although this may seem to make a business safer, in reality it can make trading riskier - and reduce growth. The pandemic has changed a lot of business practices, one of which is a rise in proforma trading. However, proforma trading can restrict growth just when it is most needed.Proforma payment means requesting payment upfront via a proforma invoice before goods and services are delivered.Many companies are demanding proforma payment terms as they attempt to trade out of the pandemic.
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