Factoring Blog

Are your Commercial Customers Worthy of Net 30 Day Credit Terms?

Most commercial clients will demand 30 day to 60 day payment terms as part of their sales contracts. This means that their vendors have to deliver the goods and then wait up to 8 weeks before they receive payment. Clients do this for one simple reason – it improves their cash flow. It’s like getting an interest free loan from your supplier. Obviously, it’s a great deal if you can get it.

Problems with offering credit terms

However, as a supplier you are faced with two problems. The first problem is determining if you should offer credit terms to your client. Not every client deserves terms. Some clients are great payers. Others are slow payers. And many are “non payers”. Obviously, you want to do your best to avoid these last ones. The second problem is that offering terms can create cash flow problems if your company can’t afford to wait for payment. We’ll cover that subject at the end of the article.

The first thing to keep in mind is that no credit review method is 100% perfect. They don’t eliminate all credit problems – rather –  they minimize the chances that problems will happen. Unfortunately, some bad clients may get through the cracks, even if you are very careful.

There are three steps to determining the credit worthiness of a customer:

Step 1: Evaluate the credit application

You should ask every customer that wants net 30 terms to fill out a credit application. Large businesses do it every day- so why shouldn’t you? The application can be short. They key information you need are business name, address and trade references. A trade reference is a supplier that has worked with this client before and can confirm their payment habits. You should call each trade reference and politely inquire about their experiences with your prospective client.

Step 2: Evaluate commercial credit reports

If you are not running commercial credit reports on your customers – you should consider doing so. These reports are created by commercial credit bureaus that gather information form the marketplace. Many contain actual credit experience reported by suppliers. Three well known providers are Dun and BradsteetExperian and Cortera. These providers offer reports with different level of detail and complexity – at different prices. Many of their reports also include a recommended credit line which can be used as a guideline to establishing how much credit to offer your client.

Step 3: Make a trade credit determination

Here is the challenging part. Gather all the information you have and use your best judgement to make an informed decision. Many times the decision will be an easy yes or easy no. Often, you will need to use your judgement and make the best of the information you have available to you.  One word of caution. If you are thinking about providing a client with a large credit line you should consider buying multiple credit reports from different providers since some of them use different data sources. This will help you get a more complete and balanced picture.

But – what if you can’t afford to offer credit terms?

Now the last point – what if you can’t offer trade credit because you can’t afford to wait 4 to 8 weeks for your invoice to get paid? A simple solution is to use factoring. It’s a solution that finances your open invoices from credit worthy clients. It is designed specifically to handle this particular problem. Also, many factoring companies also have substantial credit expertise. You can usually outsource some or all of the credit decision making function to them, enabling you to leverage their skills.

Disclaimer: This article is provided as information and not as financial or legal advice. Please hire a professional if you need advice.

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