Timber sales credit procedure
Statement
Credit for timber customers is a facility provided by NRW at its discretion, to permit regular timber customers in good standing, to despatch timber daily, and to pay for it in line with the credit facilities. This allows customers to manage their cash flow so that payment is made on time, and it reduces the transactional costs for both parties. Even so, any credit facility introduces an element of financial risk for NRW that must be managed.
Transactional Finance Support Team (TFS), Business Support Team (BST) and Timber Sales Team (TST) must play their part with Operations Teams in an effective credit management system, which embodies excellent customer service, to timber buyers and to NRW.
TFS must:
- Actively engage with the customers to manage account status and resolve queries.
- Set, manage and review credit limits.
- Actively manage payments that fall due.
- Suspend trading where the customer fails to pay on time.
- Prepare and distribute the daily despatch bulletin.
BST must:
- Manage timber despatch and self-billing invoicing and resolve despatch issues with the customer.
TST must:
- Engage with TFS and customers to agree trading levels and credit applications.
- Consider the volume forward sold to the customer before awarding more contracts.
- Maintain a market awareness of the customer’s position and potential changes.
Operations Teams in Place must:
- Manage the customer’s sales contracts to appropriate and timely starts and conclusions
- Facilitate access, despatches and time extensions as appropriate, to allow the customer to meet their obligations.
- Manage timber security.
Purpose
- To guide the setting of appropriate credit limits for timber customers to reduce financial risk, to NRW, whilst permitting a suitable and sufficient level of trade for customers.
- To guide the management of credit facilities in accordance with the terms of timber sales contracts.
Scope
This guidance is relevant to;
- BST management of customer despatches and pipeline credit against cleared payments.
- TST management of customer compliance with Timber Sales Contract terms and conditions.
- TFS management of credit limits and payments falling due.
Procedure
Overview
- Customers must complete a credit application form, by requesting this from the TFS team, for a new credit facility or to change their existing facility and send this via email to TFS Timber Mail box - Allocations@cyfoethnaturiolcymru.gov.uk
Then, in line with this Procedure document…
- TFS will check that the customer is eligible and request any information required to determine the application. Once TFS has all the information, the aim is to decide the application and notify the applicant within 6 weeks. Though more complex requests may take longer as it may involve legal advice.
- TFS will copy the application to TST. TFS will consider the financial information and TST will consider the customer’s trading position considering forward sold contracts.
- TFS will propose a credit limit and discuss with TST to agree a position.
- TFS and TST will apply the decision as per this guidance.
- TFS will monitor, manage and review each credit facility, liaising with TST and BST as necessary.
Timber sales credit terms
Billed customers
Credit terms for timber sales are expressed in the contract terms and conditions as…
Payment is due at the end of the month following the month in which the invoice is raised.
Invoices are raised the following day by MyNRW for each despatch of timber. To manage the ‘pipeline’ value of despatches they are given an estimated weight of 25 tonnes each until the load is weighed and the actual weight recorded. Pipeline does not include VAT which is added once the invoice is raised.
TFS sends statements to customers shortly after the end of each month to show all invoices (estimated or actual weight) raised incorporating the credit or debit adjustments for estimated despatch weights converted to actuals in the month. The statement balance must be paid for all invoices falling due for payment.
Example
The customer despatches 20 loads of timber in June on credit terms. The despatch data from TSS (BST) then automatically feeds into MyNRW (TFS) which generates 20 new invoices during June. TFS sends an account statement to the customer at the start of July incorporating the new invoices, any payments made in June and any adjustments to estimated weights. The customer must pay the balance on that statement by the end of July.
Due payments must be made in full. Customers may not withhold part of a due payment in order to maintain a credit balance on their account, unless a regular payment plan has been agreed with the customer and it is being met.
Self-billing customers
Self-billing customers will email a CSV file of despatch data along with their invoice weekly to TFS. Each invoice will cover one or many despatches. The Customer will make payment against their supplier’s invoice at the end of the following month in line with credit arrangements for billed customers.
Eligibility for a credit facility
Credit is offered at the sole discretion of NRW. Even so, credit applications must be considered and offered in a fair and equitable way. This does not mean that different customers get equal credit facilities, as the level of credit offered will be specific to each customer’s circumstances. However, each customer must get the same opportunities to apply and be considered for credit facilities, and each customer is to be treated equally in NRW’s management of their credit. Equal treatment means for example, that every customer will be required to make each payment as it falls due.
New Customers
New timber customers will be required to trade as cash customers for up to 12 months prior to requesting a credit limit. BST will inform all new customers of the payment process and despatch procedure prior to first uplift. The Timber Sales & Marketing Manager in agreement with Financial Transaction Services, may reduce that period at any time and to any shorter length of time if they are content that the customer or their representative has a known trading history in the industry already, via local knowledge and input from the Head of Sales and Marketing.
Monitoring of new credit customers by Transactional Financial Services will be rigorous and any missed payment or exceeded limit for any reason at all, will result in suspension of credit and trading until all due payments, or any additional interim payments, have cleared.
Deed of Guarantee
In lieu of cash trading, a new customer (or one whose legal status has changed for example, through corporate merger or buy-out) may offer a Deed of Guarantee from a larger parent company to cover the customer’s requested credit facility. This will be acceptable if the Deed is not time bound and it is agreed by Legal Team.
The customer’s credit limit will be set at 95% of the requested credit limit and despatches will be suspended if that is exceeded, until due payments or any interim payments are cleared. The customer may trade under a Deed of Guarantee indefinitely if necessary.
The validity of a Deed of Guarantee must be re-confirmed by letter with the parent company from time to time in line with normal reviews of credit facilities. The customer must arrange for this confirmation and pay any associated costs.
Bank Assurance
New businesses without a trading history or set of accounts may produce a written Bank Assurance document offering to underwrite a requested credit limit. This will be acceptable provided The Bank Assurance explicitly covers NRW’s lost timber value in the event that the customer defaults, and states that the bank will provide that assurance for at least 24 months. The customer must arrange and pay for their bank to provide any additional document or letter NRW requests to make this explicit assurance.
The customer’s credit will be set at 90% of the Bank Assurance figure and despatches will be suspended if that is exceeded, until due payments or any interim payments are cleared.
The customer must apply for and be granted an NRW credit limit within 24 months, supported by their trading record and annual accounts. If a credit facility is granted, and it may well be less than the Bank Assurance figure, the credit facility supersedes the Bank Assurance, which can no longer be relied upon. If a credit facility is refused, the customer must provide a new Bank Assurance otherwise they will revert to trading as a cash customer only.
Credit limits
Credit limits are at the discretion of NRW and are in place to reduce NRWs commercial risk. Customers who do not wish to trade with NRW on the credit terms offered can only trade as a cash customer making down payments in advance of despatch.
Consideration of customer trading levels with NRW
Generally, and provided there are no significant risks identified, a working credit limit for billed timber customers should seek to accommodate 8 to 10 weeks’ normal trading capacity. This is to allow for payment on the timber sales contract terms, plus a margin to allow for continuity, for example to allow some trading during the routine resolution of any despatch issues.
Credit limits that greatly exceed that required for the customer’s trading level are an increased risk to NRW and should be managed down to a more acceptable level whenever the limit is reviewed (see ‘Reviewing credit limits’ section below).
Consideration of financial information
Credit ratings produced by credit agencies such as Experian are an important part of the whole picture, but may not necessarily reflect the market conditions for the trade in roundwood timber where there are limited supply options (growers) and larger customers have a heavy dependence on a constant supply from NRW.
When a customer requests a new, or increased credit limit, TFS will form an initial view of a suitable credit limit from the customer’s financial data (the Experian report and last set of accounts, or Profit & Loss Statement, Guarantee or Assurance), as well as their past trading history with NRW, and will also check Company House information. For increases of credit limits, past management of pipeline credit and management of due payments should also be taken into account. We would not normally accept limits which exceed the Experian credit data
Deeds of Guarantee and /or Bank Assurances offered by the customer can be given relatively higher weighting in this consideration of financial information. See ‘Eligibility’ section.
Determining an appropriate credit limit
The customer’s requested credit limit should be treated only as an indicator of the customer’s expectations rather than a figure to be agreed or not. NRW may decide to offer a lower credit limit instead of refusing the application outright.
TFS will determine an appropriate credit limit for the customer in discussion with the Timber Sales & Marketing Manager (TSMM), considering the financial view together with the necessary trading levels and any market intelligence, price trends or other information the TSMM may be aware of.
The rationale for any decision will be recorded and held by TFS with the customer’s credit files. TFS will also consider whether other forms of assurance are required such as bank guarantees are appropriate.
Managing our Money will determine who will approve changes to credit limits.
Applying the credit limit
If the agreed credit limit will accommodate the customer’s request level, then TFS will deal with the customer (and TST and BST as necessary) to set the requested facility up and manage it.
If the agreed credit limit does not accommodate the requested level, then TFS will discuss with the customer first. Once a reduced limit or other way forward has been proposed (e.g. a reduced trading level or interim payments to accommodate a reduced credit limit) TFS will inform TST and will deal with the customer (and TST and BST as necessary) to set that facility up and manage it.
Payment plans
Payment plans may be used to allow the sale of new timber parcels to a customer who is trading close to their credit limit, or for a customer to manage a trading level above that accommodated by their credit limit.
As part of their normal management of credit customers, TFS may require a customer to make regular interim payments (for example fortnightly payments) to permit temporary trading levels that would otherwise cause pipeline trading to exceed their credit limit. Ideally a payment plan should also seek to create additional headroom to allow trading until the next payment falls due.
The customer may also request a payment plan to help them manage their trading level too.
TFS will decide and manage any additional payment plan, as appropriate for the individual customer. TST and BST should be informed if a payment plan is being considered for any customer. If the customer decides not to do this when requested by TFS, then the credit limit is firm and despatches will be suspended each time the credit limit is reached until all due payments, or any additional interim payments, have cleared.
Daily credit monitoring
The customer’s billing file is automatically generated by TSS each night, uploaded to DMS and sent to ‘MyNRW queries’ for checking. Once checked by TFS it is uploaded to MyNRW to produce invoices. Mismatched data and other issues are notified to the BST team by the customer to investigate and resolve.
FTS will prepare the daily credit bulletin listing the current position for each customer and send to the agreed distribution list that they maintain. Once a year TFS will check that the recipients of the credit bulletin are appropriate and correct.
Continuous monitoring of credit usage will be undertaken by TFS. Generally, if the rate of payment over a month is matching the rate of credit used over a month then trading continuously around the customer’s credit limit is acceptable.
Any default in an invoiced due payment should trigger a stop on further despatches until a payment is made.
All customers
Stage 1 Customers who exceed 80% of their limit are emailed by TFS that day advising the position.
Stage 2 Customers who exceed 95% of their limit are emailed by TFS that day advising them to pay an amount to their account immediately.
Stage 3 Customers who have not paid an amount as requested the day before, and so go over their credit limit are to be contacted immediately to establish a reasonable cause such as;
- Customer is awaiting a credit from NRW. An extra day is allowed before acting further.
- Customer states they have paid that day. An extra day is allowed before acting further.
If a reasonable cause is not established, or the extra day to rectify the situation does not result in reduction of credit to below the limit, the customer is to be immediately prevented from despatching more timber (See ‘Placing a stop o despatches’ section below).
Self-billing customers
The rate of despatch may vary a lot during a working week depending on factors like weather, access, and contract management requirements. A self-billing customer’s pipeline credit value can temporarily exceed their limit until the next invoice is paid (usually weekly). SBI is sent in weekly, payment is not necessarily done weekly.
TFS will monitor all self-biller’s pipeline credit value to check these immediate trading fluctuations. Where pipeline credit is temporarily high, up to 110% of the credit[1] limit is acceptable for 5 business days (1 week) or less. Exceeding these limits for longer than 1 week will trigger a stop on despatches until an additional payment or the next due payment is made.
Placing a stop on despatches
For credit control purposes, TFS will manage this process and decide when a customer is to be placed ‘on stop’. TFS will inform BST by email as soon as the decision is made and request BST to stop (and re-start) the issuing of further despatch PINs to the customer. Given that the pipeline credit value can build quickly, this must be done quickly to give the customer an opportunity to put their account right immediately.
The customer must be made explicitly aware of the intention to stop despatches due to them exceeding credit limits or not paying due sums, before the ‘on stop’ action is implemented. This ‘fair warning’ is built into the self-billing agreement, and the 3-stage process outlined in the ‘Credit monitoring’ section above, so it should not need to be done separately. Even so, TFS should check that ‘fair warning’ has been given before suspending despatches.
Despatches already requested at the time the customer is put on stop should be honoured.
Reviewing credit limits
Each credit limit will be reviewed at least once every 12 months by TFS. A rota will be used to conduct them throughout the year rather than all at one time. Customers are expected to notify us of a change to their trading status by revising their “Timber Sales Questionnaire Form” which is pre-requisite of bidding in eSales. This includes merger, takeover, County Court Judgements, IVA, DVO or charges filed against a business. Any known or suspected change in a customer’s trading status, (including market intelligence from operations or sales staff) will also trigger a credit review.
If, at the time a review is due, TFS have done a review as above, considered a customer’s request to increase a credit limit, or considered an intervention such as payment plan in the previous 3 months, that counts as a review and the next review may be held over to the next year.
A credit review will start with TFS notifying the customer by email and requesting any changes to the original credit application form. The review will then follow the Credit Limits section above. Additional information should be requested if needed (see Bank Assurance above). Where there are no declared changes and no indication of concerns from past trading, Step 3 can be minimised to an Experian check and last year’s P&L statement.
Managing credit limit reductions
When a credit facility is to be reduced following a review, TFS must inform TST and BST and then notify the customer in writing. TFS must propose a reasonable timescale to achieve the reduction without causing a significant step-change in the trading capacity / cash flow of the customer.
The customer may propose an alternative timescale to allow them to make any necessary arrangements and NRW will consider the customer’s position favourably, provided the transition can be completed within an overall timescale of 4 months.
New timber sales contracts
About 2 weeks before each national timber eSale, TST will request advice from TFS on whether any customers are giving concern over their credit use and payments. Indications of concern might include:
- Trading consistently near their credit limit in the past 3 months
- Failing to make a full payment in the past 6 months
- Payment plan in place to manage credit limit
- Request received to increase credit facility
TFS Team Leader, or a delegate, will be invited to each eSale award meeting to offer advice on the day. If TFS flag a concern with a customer and that customer offers highest bids in the sale, those bids will not be accepted before TST discusses the potential implications with TFS. Following that discussion, TSMM will decide either sell some or all the new contracts to the customer, or to sell to an underbidder instead. All recommendations and decisions will be recorded by TST as part of the sale documentation.
Related Policies / Procedures
Sale contract schedule 5 – despatch procedure
DI DRN Weigh ticket process
Contact
This procedure and related procedure is owned by Head of Finance and managed by Transactional Finance Services. It is developed in partnership with Timber Sales Team and Business Support Team.
Approval
Approved by: Head of Finance
Approved by: LTG /ET
Version & Review
First published (date). 01/10/21
For first review in 12 months’ time and then every two years. Amendments will be made sooner where a relevant change in legislation or business requirement occurs and following discussions with the representing Trade Unions.
[1] For self-billing customers trading on a Bank Assurance or Deed of Guarantee, the available credit is reduced to 90% of the assured sum or 95% of the guaranteed sum as set out in the New Customers section.