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Commentary: Apparel industry needs to overhaul payment terms after COVID-19 crisis has exposed how existing system benefits brands while suppliers bear financial risks

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"Apparel industry payment terms no longer fit for purpose", 20 April 2020

... [T]he immediate reaction of a large proportion [of brands and retailers to the Covid-19 crisis] has been a scaling back or delay of current production orders. This has caused major problems to apparel manufacturers... as their cashflow is immediately affected and they struggle to raise the necessary funds to pay their workers, their suppliers and to cover overheads and utility bills…

Payment terms within the apparel industry... differ sharply from normal trade practices… More often than not… payment terms… benefit the customer but expose the supplier to financial risks…

[The] prevalent system... is that of the Sales Contract (SC)... [where] a manufacturer will rely on a Purchase Order (PO) from a customer to execute an order. Based on the PO the manufacturer and customer will create a SC to allow the manufacturer to raise his own [Letter of Credit] to procure the necessary raw materials to complete the customer’s order... [T]he buyer commits to making payment for the goods after receiving copies of the documents relating to the shipment of the order… [T]he manufacturer has a legal right to receive payment for goods produced under the proviso that the goods comply with the customer’s terms…

The flaws in the SC payment system has been harshly exposed by the Covid-19 pandemic as customers...  are withholding payments or cancelling orders, leaving the manufacturer, without the security of a bank guarantee, financially exposed. It is fair to suggest that the current payment terms... benefit the customer to such an extent that they are untenable for the future. A new system of payment terms needs to be established for the industry… that is endorsed by international agencies and is respected by all participants…

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