Briefing note

Safer procurement

Safer procurement

March 2023
A new approach to settling purchases

Many companies import raw materials or components to produce products. If their procurement departments source these from suppliers in countries where they do not have the benefit of an efficient and fair legal system, they expose themselves to certain risks.

A company like BASF, for example, procures approximately 35,000 different goods from 6,500 suppliers, according to their latest financial statements. Assuming that a great deal of the overall procurement is shipped across the ocean and is likely to be in transit for approximately 30 days on average, a few questions come mind: at what moment would a company like BASF actually pay for these goods? Would they prepay their suppliers (or make down-payments)? Would they be offered credit? In reality it will come down to ‘a bit of both’ as suppliers will usually only receive a down-payment and will have to finance the balance of the order out of their own means. In this scenario both parties run a risk: the supplier may not get paid (the balance), and buyer may not receive (all) his goods at the agreed place of delivery.
It is currently common practice that the risk of non-payment is dealt with by the issuance of some kind of guarantee, most commonly an LoC, supported by a bank. This will then protect the supplier. However, the procuring party often has to make a leap of faith regarding the competencies of the supplier. Some procurers ask for performance bonds, but these are complicated documents, putting these in place involves a considerable effort, leaving aside the extra costs. As a result, performance bonds are relatively rare as most manufacturers will simply refuse to enter into this kind of security arrangement.  

So, how can we mitigate the risk the procurer faces when dealing with a far-away counterparty that is demanding a down-payment in order to start the production process? The mechanism would have to protect both parties and make sure that the supplier gets paid and that the procurer receives the goods at the agreed place of delivery. Rather than both parties having to enter into complex arrangements, a settlement mechanism that is based on a simultaneous transfer of goods versus payment would make things much easier. A common way of settling international transactions is ‘payment against documents’, however, this still leaves the procurer exposed with regard to the down-payment.
To solve this one should really use an Escrow mechanism. An Escrow works like an exchange: a third party (the Escrow agent) decides whether both seller and buyer have fulfilled their obligations. If this is indeed the case, this third party will then settle the transaction by releasing the payment to the supplier and allowing the buyer (procurer) to collect the goods. If, as with an exchange, this escrow process were easy to enter into and comprise a seamless route to settlement of a transaction, one would have solved the problem.

Safer procurement

The Mercurion Platform offers a digital Escrow process, easy to access and very user-friendly. Through the platform one effectively gets a comprehensive security, protecting both parties in the transaction for the lowest price (in terms of speed and costs). In addition, the platform’s interface comprises a dashboard which allows both parties to monitor the status of all outstanding trades including the whereabouts of any goods in transit.

Trying something new is never easy. However, as a procurer the Mercurion platform will offer some major advantages, of which the main ones are: security and transparency. Why not have a look at it?

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