Never be Afraid to Switch Credit Terms

30 May

Buying on credit is an arrangement that is beneficial to both the seller and the buyer. The seller is able to move product quicker and in larger quantities. The buyer is able to delay payment until they have had time to hopefully sell a product of their own. The key to this relationship though is that payment is received in a timely manner. While many businesses initially operate on Net-30 terms, you should not be afraid to change this on a case by case basis.

What are Credit Terms?

We have written on this in the past, but they are essentially the terms that dictate how long a customer has to pay back their debt. From a seller’s point of view, they want to strike the perfect balance between delaying payment for too long and giving their customers enough time to actually be able to pay. Many businesses will start off with Net-30 terms, as this has become an industry standard, but this can vary depending on your industry, tolerance for risk, and a host of other factors.

Why would you switch?

If a customer has shown that they are incapable of paying under the current agreement, then it may make sense to make a change. If you give a customer Net-30 terms and they are consistently paying late or fail to come up with the full amount, you should look into whether making a change is possible. In some cases, the customer may be too important and you may just have to live with late payments (link), but in others, it may make sense to bump them down to Net-15 or even CIA (Cash-in-Advance).

How should you make the change?

While this will vary depending on your situation, a simple letter saying:

Mr/Mrs. [fill in name]

Thank you for your recent payment. Unfortunately, due to the fact this payment was received [fill in the number of days] late, we will be unable to process your orders on [Net-30/Net-60/Net-15/etc.] terms going forward.

If you wish to transition them to a CIA payment plan, the following lines should be added:

As always, you may still purchase our product on a prepaid basis. We hope you understand the need for this new arrangement and look forward to continuing our business relationship with your company. If you have any questions regarding this decision or wish to discuss it further, you can reach me at XXX-XXX-XXXX or email me at XXXX@X.com

If you wish to transition them to new credit terms, add the following lines instead:

You may still purchase a product from our company, but it will be on [Net-30/Net-15/etc.] terms instead. We hope you understand the need for this new arrangement and look forward to continuing our business relationship with your company. If you have any questions regarding this decision or wish to discuss it further, you can reach me at XXX-XXX-XXXX or email me at XXXX@X.com

Deciding credit terms can be a complicated process and you may not always be right. They key is to never be afraid to change them if you find that the situation is not working out in your company’s favor.

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