Hey All - Currently, our company is looking to re-work our payment terms and credit limit policy - what are some standard, time sensitive practices that can help us better determine terms/limits while still understanding our
Determining Payment Terms & Credit Limits
Answers
History with the particular client, both in outstanding and Days Outstanding. Buzz on the street (i.e., depending on your industry, area, etc, you may not be the only vendor they deal with and you may talk with some of the other vendors).
Today, the bank won't tell you anything, trade references will either be fake, lie or only their best customers that they always pay and financial statements that aren't audited or at least reviewed aren't worth the paper they are written on (Enron aside).
Lastly, the credit houses such as Safe Credit and D&B are not worth subscribing too, due to the bogus information and their fraudulent trade practices.
Trade references are usually their best clients, best friends or family members. Unless the client is not bright and they give you a company they are slow in paying; you know if you are able to get a response what their answers are going to be. I agree with Wayne the bank won't and can't tell you anything and about D&B. and especially Creditsafe.
There are credit service companies that have analysts.
Add in your terms " should any delinquent invoice be sent for collections debtor will be responsible for all fees to collect that debt including legal". It allows the agency to collect their fee as well as the money they owe you.
As a company which deals on a regular basis with credit analysis I do not share the above comments. We are D&B subscribers along with various other credit reporting agencies. We do share credit information with our clients to help guide them through a credit decision. This is a fundamental part of our business, having creditworthy invoices to leverage for funding.
When reporting companies lack any info on a potential account debtor, we do offer to have our client contact their customer and ask for current financials. This proves to be difficult as a customer is rarely inclined to provide their proprietary financial information to a vendor. But make no mistake; providing fake or misleading financial information for the purposes of asking for credit is a crime. A crime that can have lasting negative ramifications for the company that sets that cart in motion. Generally a legal upstanding business will simply not provide their financials rather than send over deliberate made up documents.
So without investing in third party credit reporting you will be at a disadvantage when "lending" to your customers. I frequently see situations where a customer pays the first 10 invoices and flakes out on the last one. This could potentially mean a year's worth of profit for a company. So the stakes are high in some cases.
Another avenue to pursue is Credit Insurance. There are a handful of insurance companies that offer to cover your debt transactions. It is costly (but so is loosing the payment of an invoice) and it only covers very specific situations and it takes a bit of time to recover a payment. But on a $500K invoice it may be worth it in the long run.
Credit decisions can be tough. In my experience, trade references are very helpful, D&B can be, but often times they are not up to date and as Wayne stated, not always trustworthy. In my past, for large dollar credit decisions, nothing worked better than reaching out the other company's
I also like to team with the sales department as well, so they are aware of problem or slow paying customers. Not that salesmen should be doing the collections for your team, but not working too hard on bringing in future sales from that customer. In the past, product discounts have been lost due to failure to pay according to terms as well, of course, that really is dependent on product as well as the sales team. If sales commissions are earned, they could only be paid out after collection period and delayed/lost if collection is not made timely or ever.
In any case, be certain to track DSO and let management, especially sales teams be aware of that number. Where you shine the light of focus, shadows of ineffectiveness or inefficiency disappear.
Good luck!
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As a post script to my response, I would like to make an important point (albeit a slight deviation) from the other side of the fence....
A company's credit standing or financial capability are general guides. It does NOT however determine how long (if they do) pay you.
Most CFOs of companies TRY to extend their AP days for no reason at all but the METRIC. I will go on a limb and say that each and every one of us CFOs (including me) may have been guilty of this at some point. Although this has a favorable effect on each of our own company's financials, they have a detrimental effect on others....especially the smaller ones. As they say, one company's AP days is another's AR days.
As much as I would love to extend my AP days, I also take into consideration my company's resource partners (suppliers). I (we?) should protect our business ECOSYSTEM because without a healthy ecosystem/business partners, our own company's health might be in danger.
(Steps off the soap box)
Cynthia, I must have hit the wrong reply button. My apologies. This is NOT in reply to your post but should have been a PS to my initial response. Moderators?
I applaud you for asking. However, THESE should NOT be your first questions. FIRST you (management?) should examine and decide the company's risk appetite/tolerance levels, the market (type of companies/customers) you want to serve and your company's financial capability. Oh, and the product/service, industry norms will slightly affect it too.
I believe that the answers to THESE items will ultimately shape your policies/practices. It is more prudent to base your policies and practices on the above.
Examples:
1. There is NO sense giving a 90 day credit if your company can only afford to do 30 days.
2. You are trying to give 60 days credit to AAA companies when they can afford to do 30 or even cash.
3. You want to give 30 days when the industry norm is 60.
4. Can you deliver the service/product that customers will 'gladly' pay in cash or over and above industry norm?
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Emerson, you have exposed business's dirty little secret. Unpaid invoices are no cost investment dollars to the payor. Large companies have grown on the backs of small vendors who are faced with having their big customer abandon them if they complain for years.
Thanks Gary, I thought no one will notice the reply. My post script (which I misposted to Cynthia's reply) is actually more important than my initial point/response.
The ECOSYSTEM is much more important than the pursuit of METRICS!
Again I say, your AP days is another firm's AR days. Be careful of who you squeeze! Your extra 1 day (AP days metric) may mean the lifeline to a small firm that depended on your payment yesterday.
I so want to make a parallel of my point to the environment....but I digress.
As a side note, the auto bailouts is much more about the suppliers than the companies themselves.
My practice is very similar to Cynthia's. Trade references are helpful in showing that the company is capable of paying on time. Then the personal touch is helpful in getting us to the head of the line when payments are made. If we keep in contact with the company, they tend to remember us and get things paid. This involves our sales team as well as they visit the customers and keep up the relationship as well.
If we're unsure at the beginning, we give them a small credit line and then raise it when they prove to be reliable.
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