This is where, for example, changes to payment terms, such as staged payments or retentions, will result in a reduction in both cost and risk. This type of efficiency is likely to be a one-off and should not, therefore, be extended over the life of the purchase.
Note: In general 'up-front' ie pre-payments should be avoided due to the risk of your institution becoming a creditor in the event of liquidation. However, where they are made, it is strongly recommended that a Banker's Guarantee be obtained to cover the value of the 'up-front' payment.
Examples of risk reduction include:
|1||Payment with order reduced/deferred, calculated on pro rata basis: [delivery lead time x interest on advance payment]|
|2||Retention of final payment until satisfactory acceptance, calculated on pro rata basis: [(installation period + period of non acceptance) x interest on retention sum]|
|3||Staged payments, calculated on pro rata basis: [balance of the contract sum x interest on the remaining period of staged payment, pro rata]|
|4||Title and risk with supplier until final acceptance, based on the value of insurance premiums, security, double handling, off-loading costs, etc|
|5||Liquidated damages ie costs recovered for non-performance etc.|
|6||Reduce risk of loosing stage payments should the supplier default on contract|