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The Impact Of Supplier Hopping

April 26, 2021Cash Flow

When buyers purchase goods on trade accounts there is always a risk that buyers will take their stock and run. This is called supplier hopping. The way it works is:

  • A buyer signs up with a supplier and orders some stock on credit.
  • The stock is delivered and an invoice is raised.
  • The buyer ignores the collections calls and moves on.
  • They find another supplier of the same product;
  • Repeat.

This turns into a vicious cycle and suppliers are left with the bill.

This is now common place, so how do you make sure you’re not leaving yourself open to be a victim of supplier hopping?

To help you out, we have provided some helpful pointers that you should take into account before taking on new credit customers.

This turns into a vicious cycle and suppliers are left with the bill.

This can be devastating to a small business as well as established businesses. One unpaid invoice turns into several, and slowly over time these invoices compound into money that could have been spent on more productive activities.

 

Identifying & Analysing Supplier Hoppers

Red flags are visible early on (if you look) and start with customers paying you late. Some deeper research might show:

  • Inconsistent ordering. Month on/Month-off)
  • Defaults or Court actions have been lodged against your customer.
  • Director has multiple Directorships.
  • Shareholders and Directors are different people.
  • 10+ credit inquires on a credit report in the last 6-months.

 

Monitoring Business Credit Risk

Ongoing management and attention to detail can make the world of difference.

  • Perform ongoing credit checks on existing customers.
  • Check-in with trade references that were given to you in the initial credit application.
  • Account manage your customers. Phone calls or visits and a general chit chat can give you the info you need.
  • Look for software that stores information across a large amount of suppliers and see if they aggregate trade credit limits and balances.

Supplier hoppers will always be a problem. As a supplier, you need to prepare yourself, pay attention and do research.

 

The damage caused by Supplier Hopping:

The results of a recent Australian survey show that businesses’ credit policies are shaky.

Prior to making any trade credit decision, a suppliers standard business practises include assessing the credit quality of the client (as mentioned by 26 percent of respondents).

The same proportion of respondents often give early payment incentives to entice consumers to pay their bills ahead of schedule.

Although there appears to be a strong emphasis on receiving invoice payments, 1 in 4 Australian respondents reported that they do not have a strategic credit management strategy.

This means staff at 25% of businesses don’t know what to do when someone doesn’t pay.

In the Australian wholesale/retail/distribution market, on average, 2.1 percent of B2B receivables is written off as uncollected. The worst sector in the country.

Based on the total value of B2B invoices, the value of overdue invoices in the wholesale/retail/distribution sector is 31.1 percent.

This compares to a manufacturing sector average of 20.1 percent and a service sector average of 15.7 percent. As if the outlook wasnt bad enough, identification and mitigation of the associated risks are near invisible.