Credit terms have been around for a long time and from a personal perspective, is an act of trust. A trust that whoever you have given those credit terms to, they will pay accordingly. Your credit terms set the time frame and limit you are willing to provide for payments on products or services you sell. In effect, the longer the term and larger the limit, the more you trust your customer.
As businesses exist in a competitive environment, it’s not unusual to offer the same or better credit terms to gain competitive advantages such as increased sales and customer loyalty. However, the fact is, agreeing to provide credit terms means giving up on immediate cash flow on a promise (or sometimes, hope) that you will be paid at a later date. This brings with it many challenges, such as negative cash flow, high bank debt and lower profitability, all of which severely restricts your ability to honour your obligations to staff, vendors, banks, factoring houses, customers and ultimately, your reputation (https://bit.ly/3wpBATU).
Commercial considerations aside, you are now acting as the banker to your customers and you wear the losses if your customer defaults. The solution? Find the right balance. Accepting that credit terms are the norm of business transactions, what can you do to find the right balance between your cash flow and customer loyalty? Whilst it’s common for businesses to offer product discounts and credit terms to acknowledge customer loyalty and increase sales, the better alternative is to offer discounts at time of payment instead of time of sale/invoice.
This simple shift will incentivise early or on-time payment and gives customers the choice to either pay on-time, or even better, pay early based on their available cash to take advantage of the discount. Whilst all forms of discounts immediately affect your profitability, it must be considered against your cash flow (money in vs money out) equation as well as factor in the hidden costs of chasing money, bad debts and the toll on your mental well being. Try our calculator on the Parakeet website (https://www.helloparakeet.com/).
Using early payments discounting to shorten the collection time on money owed is a great strategy, as long as you have the technology that enables you to automate the brokering of discounts, real time calculation and policing of the discounts to permanently release the stress in your business. It makes being accountable easy for both parties. Look for technology that can provide banking and credit card payment options, matching of discounts (provided by suppliers and offered by customers), collection of discounted payments once agreed, back office integration into your own accounting software and the flexibility to do it all on the run.
Getting paid early has always been the goal for most businesses. It’s now possible with the right technology.