How Business Credit Scores Impact Payment Terms

It’s easy to get excited when you finally close on a sale, but a sale is never final until the invoice is paid. No matter what you’re selling, all companies run into issues when trying to collect on an invoice. As an incentive to pay on time a company may offer payment terms to their buyers. Payment terms can vary in length of time, but it gives the buyer time to satisfy their bill after receiving the product. Businesses are not required to offer terms, but they are given to buyers who have a history of paying on time to give them time to collect on their receivables. Sometimes payment terms come with discounts that are extended if the debt is paid in advance.

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 must 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 are used more-commonly.

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 the pros and cons

Pros –

  • Many buyers expect to be extended payment terms because having the payment due upon receipt can be unrealistic. If you don’t offer any terms you might be limiting the number of businesses that will purchase from you, because they are looking to work with a company that will offer payment arrangements.
  • 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 your customers pay by terms, 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, 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 to make sure they are trustworthy. Most companies review Dun & Bradstreet, Equifax, and Experian business credit report reports but some use smaller business credit bureaus that are not as well known. It’s up to each company and personal preference which bureau(s) they use.

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 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 any new potential of payment failure in the future. Agreeing to terms with unworthy accounts/partners could cost you in lost receivables 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.

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 the 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 arrangement, 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 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 about business credit repair and monitoring.