Whenever a business provides a good or service for a fee payable at a later date that constitutes a credit sale for which credit terms or payments terms are applicable. As an example, ‘net 30 days credit’ means that a customer is required to pay their invoice within 30 calendar days of the date the good or service is delivered.

Well-managed credit terms are essential to the health of all businesses as early and on-time payments help businesses maintain a healthy cash flow while late payments put businesses at risk of insolvency and bankruptcy.

Given this importance, it’s well worth the effort to negotiate credit terms favorably with new and existing customers and clients. Here are some tips for successfully negotiating credit terms.

 

1. Ask customers for shorter credit terms

Large businesses often have clearly defined and immovable payment cycles. This makes it difficult to negotiate alternative credit terms. That doesn’t mean you shouldn’t ask for terms that suit your business. As the saying goes, ‘you’ll never never know if you never never go’, or in this case, ask. At the very least, you can find out what the entity’s usual payment cycle is and that may give you an opportunity to choose a more suitable time for providing your goods and services so as to minimise your credit terms. As an example, if a business requires you to submit invoices by the third Friday of the month in order to be paid in the following pay cycle, you can ensure you deliver your goods and services on or before the third Friday of every month.

When working with smaller businesses that don’t have set payment cycles, asking for shorter credit terms may be simpler and more effective.

 

2. Offer incentives

When customers or potential customers are reluctant to agree to short credit terms, the offer of an incentive can be a great motivator. Examples of incentives you might like to consider include:

  • free shipping
  • discounts e.g. 2/10 or a 2% discount for payments made within 10 days instead of 30 (this is the most common form of incentive)
  • prompt payment rebate scheme (you can provide a rebate if several or a string of payments are made on time)

Incentives for early and on-time payments are probably familiar to you as many essential services providers offer such incentives. As an example, many Australian electricity suppliers offer pay-on-time discounts.

 

3. Penalties for late payments

The flip side of incentives is penalties. If you can’t get customers to agree to shorter credit terms, you can at least encourage them to pay on time by implementing a penalty if they pay late. Make sure you include penalties in your contract or terms and conditions so your customers know what the consequences of late payment are.

 

4. Partial upfront payment or a deposit

Even if you end up having to accept long credit terms, you can still lower your credit risk by requiring a partial upfront payment or deposit. In that way, if a customer is unable to pay their entire debt, you’ll already have received at least some of the money.

For the sale of goods if you can cover the cost of the item with a deposit then you’ll never make a loss on a sale.

 

5. Other Way To Negotiate Credit Terms

No matter what steps you take to develop good credit terms and minimise your credit risks there’s still a chance you’ll be affected by a late payment or bad debt at some point during your business operations. You can minimise the effect of late payments on your business by selling unpaid invoices when you need access to the funds.

A great way of preparing for this eventuality is to set up an account with an invoice financing platform now, ahead of time. If you ever decide to sell an unpaid invoice, having already set up such an account will mean you simply need to upload your invoice to get started. That’s much easier and quicker than setting up an account when you’re ready to sell an invoice. And if you never decide to sell an invoice, the account doesn’t cost you anything.

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Purchasing credit insurance is also a great way of protecting your business ‘just in case’. It’s a more expensive option, however, and not all businesses will be able to afford it.

 

 

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