“Creditors have better memories than debtors. And creditors are a superstitious sect; great observers of set days and times”. Benjamin Franklin. The first recorded use of credit dates back nearly 3000 years ago, to ancient Babylon and Egypt.
In those civilizations, buyers who did not have the necessary hard money to pay for goods could purchase items from certain merchants and agree to pay for them at a later date.
The merchant recorded the debt, and instalments or full payments were required within a certain period of time. Buying things on the ‘never-never’ therefore has a long history.
If the adage, ‘cash is king’ is critical to a successful modern business, the use of credit plays a key role in the smooth running of supply chains.
After profits and bank funding, one of the prime methods of financing a business is that of buying materials and services on credit.
The supply chain
For most of a supply chain, everyone has a supplier, and everyone has a customer. The fruit supply chain might look as follows:
- At the start are the businesses which supply manufacturers of equipment, materials and providers of services
- Then, those manufacturers of equipment and materials, and suppliers of services
- The orchards which use equipment, materials and services to produce, pack and transport fruit
- The wholesalers and supermarket chains which buy fruit from orchards
- The retailers who buy fruit from wholesalers
- Finally, the end-consumer who buys the fruit from retailers, including supermarket chains.
Out of this entire chain, only the end-consumer might pay cash for purchases, and even that may as likely be through a credit card.
For the rest, credit represents part of the dynamic tension between each of the chain participants. Weak players may be expected to experience strict higher prices, credit payment terms, or to pay cash; stronger players may be able to effectively use credit as a cheaper form of finance than bank rates.
The legal relationship
Although rarely described at the time each transaction is made, a legal contract exists between a supplier and a customer when goods, materials or services are bought on credit.
One party, the supplier, must sell things which are ‘fit for purpose’—that is, they must perform the job which a reasonable customer would expect them to perform. Service providers must solve problems, not cause them.
In turn the customer is agreeing to pay for the goods or services within a specified time, as usually stated on an invoice.
If goods are ‘not fit for purpose’, or services do not solve problems then the customer has grounds for legal action against the supplier.
The supplier has grounds to take legal action against a customer who does not pay the account on time.
Written contract (continued next month)
For more information, see Tree Fruit Dec 2014
