How To Get Payment Terms With Strong Business Credit

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How Business Credit Scores Impact Payment Terms

It’s easy to get excited when you finally close on a sale that you’ve been working on for months.

But all sales professionals know that the sale isn’t really closed until the invoice is paid.

Most business owners run into issues when trying to collect on an invoice. This is why many companies offer payment terms to their buyers. Payment terms can vary in length of time, but it gives the buyer a pre-determined number of days to satisfy their bill. Businesses are not required to offer terms, but they are given to buyers who have a history of paying on time and to give them time to collect on their receivables. Sometimes payment terms come with discounts that are extended if the debt is paid well in advance of the terms.

Not only can terms benefit your customers, but you’ll likely benefit from similar terms provided by the vendors you purchase from.

Common types of payment terms:

  • Immediate payment / due upon receipt
  • Net 30 / Net 15 / Net 7 terms
  • 15 MFI – 15th of the month following invoice date
  • EOM – End of the month

Net Payment Terms refer to the amount of time that a business has to pay an invoice; these terms can range from 7 days all the way up to 90+ days. Net-30 terms are a standard business practice and commonly praised throughout business schools and associations.

In an effort to collect on invoices earlier, businesses might extend a discount like 2/10 Net 30 Terms – this offers a 2% discount to buyers who pay within 10 days rather than 30 days.

If you’re planning on offering payment terms consider this:

Pros –

  • Many buyers expect to be extended payment terms because having the payment due upon receipt is often unrealistic. Therefore you’re limiting the number of businesses that will purchase from you because they are looking to work with a company that will extend credit.
  • Payment terms help create a relationship between the vendor and the customer. Reliable buyers are more likely to return when they are offered terms.
  • Offering credit shows buyers that your business is stable and reliable.
  • On credit, buyers often spend more because they have time to satisfy their invoice.

Cons –

  • Even if you’re customers pay on time and within their term, your company can experience cash flow issues when waiting for payment.
  • You will need to have a system in place for collecting on invoices that go beyond terms.
  • Lastly, in order to protect your business when extending credit, make sure you have a credit management system in place. You will need to review company business credit profiles before agreeing to trade with them in order to make sure they are worthy and reliable. Most companies review Dun & Bradstreet, Equifax, and Experian business credit reporting bureaus but some use smaller credit bureaus that are not as well known. It depends on preference which bureau they use or if they review multiple reports.

By checking a company credit profile before agreeing to terms (and consistently once credit is approved), you can see how reliable their payment history is. Business credit profiles will tell you the risk of doing business with them and the risk of the company going out of business. Even after you are working with a company and extending credit it is important to check credit regularly to pinpoint risk and pull credit if there is potential of payment failure in the future. Agreeing to terms with unworthy accounts/partners could cost hundreds of thousands of dollars over time. After 30 days, a non-credible account/partner may determine that a supplier’s service is no longer an asset, but a cost. Net-30 terms allow them to decide if settling your invoice in-full is a priority or not.

On the other end, excellent credit allows you to get payment terms also…

If you’re looking to receive a line of credit, be prepared for potential vendors/suppliers to review your business credit profiles.

At a glance, your business credit and capital determine the level of risk associated with your business, and your likelihood to deliver as promised. If you have excellent business credit, you become more attractive and you will have more opportunity to get in front of the right accounts, partners, and suppliers that will also be able to deliver as promised.

Further, having good business credit can give you the power to set the terms of agreement with your accounts, partners and suppliers, which means that if you are considering a Net-30 Payment Agreement, you will be in more of a position to set interest rate terms that will force your partner/supplier to make paying you a priority. Accounts and partners also want to know they are relying on a strong, stable, financially secure partner/supplier.

By leveraging business credit and using it to your advantage, you can use more discretion and weed out unreliable business deals and potential losses.

Business credit is unregulated, any potential or returning investors, accounts, creditors, lenders or interested party can purchase reports in order to learn insight on your company. Make sure to review reports on a regular basis and if you notice inconsistencies/errors speak with a business credit expert.

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