Updated: Aug 17, 2019
In a globalized world, payment issues are extremely important especially since the reaches of law are affected by the national boundaries between payer and payee. A frequently asked question by US companies selling in India is – What would you consider the normal payment time if one were selling to an Indian company? What can be done at the customer (outside of India) end to influence when they pay?
Normal payment terms within India are terrible…. Normally 90 days is considered the norm for the domestic market and longer terms are fairly routine. That is the domestic scene. It is such a problem that companies have to mention in their tax filings if they have outstanding payments to small mid-sized companies. This is a way for the Indian Government to provide some protection to the smaller players. I don’t know how effective it is. However, case in point, receiving payments in India are painfully tedious.
For the foreign, non-Indian buyers – for companies that you do not know well – and that means you have not had f2f meetings with – I would suggest a letter of credit (LC). Indian companies dealing with a new company in the West will always ask for a signed letter of credit. Therefore, since you are the seller, it would be perfectly OK (not culturally offensive) for you to ask for the stringent sight letter of credit and then work your way to some negotiated settlement of a bit more liberal LC that will safeguard your interests.
There are other variations of LC’s where you can set up credit payment terms. Payment is guaranteed by the Bank on the date agreed upon. With that being said – it is not all a bed of roses – i.e. operating under an LC. In the very early days when I started operations in India in 2004, we used LC’s. When everything per plan – no issues. However, whenever there were some hiccups, more likely than not (as predicated by everyone’s ubiquitous and annoying neighbor, Mr.Murphy) then changes had to be made and things got pretty messy, as we painfully discovered. In the middle, the bank happily makes money for every change in the LC. This is only anecdotal feedback and I am sure that there are thousands out there who have had success with LC's.
We had to help a US client who had been having payment collection issues, by bringing forth litigation, in an Indian court, against the defaulters. The client only had to travel to India for the initial court hearing. A cautionary note – lawsuits in India can take a lo-o-o-ng time to get resolved. Usually, the threat of litigation with an attorney’s letter from within India gets the job done. In one instance we had to proceed to the step of filing of a lawsuit to recover the tooling. That was because our client had inadvertently paid the $120,000 for tooling that should have not cost more than $15,000. The Indian seller was not releasing the tooling and was trying to extort additional funds from our client. That is when the client approached us and asked for assistance. Threatening letters did not work. We ended up filing a lawsuit in an Indian court. Since the Indian seller did not want that fact that they had scammed a US company out of $100,000+, to be exposed.
If you are doing business in India, you should work with an established India sourcing company, that will make the process easier and reduce risks.
(The original version of this article first appeared on www.chiketa.com in 2010, and then again on Sep 24, 2015.)