As an organisation that trades business-to-business, do you sell to your customers on credit terms? You may, for example, have agreed to net 30 days. This means that the customer must pay within 30 days of the invoice date. Or, are you dealing with credit sales terms that run into months? This can be a financial stretch for any supplier, particularly those with long operational cycles or limited financial resources.
Why do companies agree to sell on credit?
When you let a customer pay months after the goods have been delivered, you are sending a message that you value your customer’s business and also that you trust them. These sentiments help to strengthen your partnership.
You’re also giving your company a competitive advantage over others that may not be as flexible as you are. After all, wouldn’t you choose a supplier that lets you pay later over one that insist on C.O.D.?
What are the disadvantages of this approach?
While it is often a strategic move to support your customer’s success, it is equally important to maintain a healthy balance between your customer’s needs and your own business needs. This is why you should never automatically agree to credit sales terms of 30+ days, especially when you’re on-boarding a new customer. First, carefully check the customer’s creditworthiness in order to control the risk of late payment or no payment at all.
Negotiating credit sales terms: what’s the best approach?
Here are some tips:
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- Invest in the relationship
When you’re dealing with a new customer, propose cash on delivery or short credit sales terms as part of a defined on-boarding process – and negotiate from there. For existing customers, however, you may need to work on your relationship a little before you broach the topic. Once you’re confident that you have offered consistent levels of product and service quality, and you’ve been engaging in regular communication, you can begin the negotiation. If your customers value your offering and the partnership as a whole, they may be more likely to take your request seriously.
- Invest in the relationship
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- Don’t neglect your own needs
While it’s important to care about customer success, you also need to take care of your own financial needs. Waiting months and months for your invoices to be paid can put you in a very unhealthy position financially – which could take a toll on your employees, your suppliers and your corporate reputation. It could even put you out of business. The goal of negotiating better credit sales terms is to find a fair situation that works for both your business and your customer’s business.
- Don’t neglect your own needs
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- Choose your timing wisely
Don’t broach this topic when you are experiencing cash flow problems and you are urgently looking for a cash flow injection. This is not a discussion or negotiation that can be hurried – you’ll only come across as desperate and erode your good relationship with your customer. The smarter move is to time the conversation strategically – choosing to kick off the discussion when your cash flow is positive. This will help you to act logically rather than emotionally.
- Choose your timing wisely
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- Don’t be afraid to call it quits
If your customer insists on extensive payment terms that could put your cash flow and business stability at risk, or the organisation has a bad credit and payment history, it may make better sense to turn down the business.
- Don’t be afraid to call it quits
- Understand your customer’s business
Often, companies focus more on their own needs than listening to what their customers need. When you understand your customers better, however, you’re in a much stronger position to negotiate with them. The more you know about their challenges, motivations and limitations, the better chance you’ll have of framing your solution in a way that make sense to them.
A solution that benefits both parties
If you are looking for a win-win, you may want to consider factoring – a business finance solution that allows you to sell your accounts receivable to a factoring firm. This way, you can unlock working capital that is tied up in your accounts receivable, while your customers still pay on the agreed date.
If you choose to partner with Merchant Factors, this specialist factoring company will help you to maintain a healthy cash position while also handling your debtor administration and credit control, saving you the time and effort.
Specialising in local and cross-border finance, this fully independent financial institution offers tailor-made facilities to suit your unique needs and operational cycle.
For fast, flexible business finance solutions – contact Merchant Factors today
Finance beyond the Numbers.
