It can be exciting gaining a new corporate client, but working with a big business and another small business can be very different. Once of these differences is that they will typically ask for net-30 payment terms. Meaning a long wait for their payment to enter your cashflow, andthere is usually little room for negotiation. You must comply or risk losing that sought after contract.
It’s a difficult position to be in. Offering terms can help you get new clients and provide a competitive advantage over other businesses. However, it can also expose your business to cash flow problems and bad debt.
Can You Actually Afford to Offer Terms?
First and foremost, you must determine if you can afford to offer payment terms. This determination is not easy to make, especially if you don’t keep up-to-date financial information in your accounting system.
A simple way to determine if you can’t afford to offer terms is to monitor your business bank account. Is it always running low? If so, you cannot afford to offer terms, as you will risk cash flow problems.
The best way to determine if you can afford to offer terms is to review your cash flow statements for the past few months. Consider working with an accountant to determine if your business can offer payment terms. Paying an accountant may seem expensive but it’s the safest approach, and it helps you avoid future problems.
Does Your Customer Deserve Term Credit?
Next, determine if your client actually deserves payment terms. By providing 30-day terms, your business is taking a financial risk. Therefore, you should offer this benefit only to clients that have a good payment record.
Offering terms to clients that have no credit, or worse, bad credit, exposes you to unpaid debts. This risk could jeopardize your ability to stay in business.
The easiest way to determine the creditworthiness of a client is to check their commercial credit.
How to Check Commercial Credit
Checking the credit of a client is fairly easy. You can purchase a credit report for most companies from one of the bureaus that collect this information. Two popular services are Dun and Bradstreet and Equifax.
Credit reports come in several formats with varying levels of detail. The simplest reports provide an estimated credit line, payment trend information, a list of reporting vendors, and a list of any legal issues. Comprehensive reports include more information and a greater level of detail.
Making a Credit Decision
Examine how many vendors are reporting data on your client. A high number of reporting vendors increases the reliability of the report. Then examine the latest payment trends. Declining payment trends, which indicate that clients are paying more slowly than before, are a sign of trouble. Lastly, look at encumbrances and legal actions.
Use your own judgment to make a determination. Assess the data and determine if you feel comfortable offering terms.
Most reports include a suggested credit line. In our experience, these suggestions are useful but aren’t always correct. Instead, examine the credit profile of the client and determine the highest and lowest credit offered by vendors. Compare the average value of these amounts to the suggested credit line. The lower of these two values is the safer one.
If the client is asking for substantial terms, consider using reports from two credit bureaus. This method enables you to make a more balanced decision, as no bureau has all the information.
* article image credit to Simon Cunningham