As a leader of your organization, you must ensure your top and bottom lines are strong and stable. You recognize that building long-term commercial relationships with customers is essential to grow, but that protecting your company from catastrophic risk is even more crucial. Your objective is to balance aggressive sales growth while minimizing bad debt loss.

Sometimes, negotiating payment terms with customers can be a difficult equation to solve without compromising your financial situation, tainting newly established connections, or damaging your company’s reputation.

Many businesses are unwilling to extend credit to new customers and instead request upfront or due upon receipt payments on sales orders to reduce the risk of a payment default. There are advantages to adopting such strategies, but in reality, you may be limiting your competitiveness and losing sales opportunities, as buyers may prefer to do business with companies providing flexible payment methods, such as open credit terms.

Let’s look at some of the drawbacks of upfront and due upon receipt payments, followed by how businesses improve sales and customer relationships by extending credit to customers.

Does your company request whole or partial payments upfront when dealing with new customers?

It is a common business practice in some sectors, like machinery, to request upfront payments when a new relationship is formed and there is no track record of the buyer’s payment history. Since you have no prior experience with the buyer, your credit department may not have a way of proving the legitimacy and trustworthiness of the business.

Your sales team has worked hard to close the new deal, and though the new customer seems trustworthy, you have to demand payment upfront.

You think that by having this process in place, you can secure all or a portion of the sales order cost and reduce the risk of a payment default. Perhaps, the process is in place to protect your business in case of order cancellations prior to delivery, since your business can still benefit from payments made upfront and recognize them as revenue.

Have you ever stopped to think about how asking for upfront payments may taint your new business relationship and reflect a lack of trust from your new client’s point of view?

In reality, upfront payments do not guarantee an order will be paid in full, even if a deposit was initially made. They also don’t help establish a reliable pulse check for a company’s ability, or inability, to pay.

So, in essence, requesting your new client pay upfront for a good or service that will not be delivered until a later date, may ultimately force the company to choose a vendor offering more flexible payment methods such as credit terms.

Has your credit department flagged customers that struggle to pay on time or at all, and though you may have deemed them unreliable, they value you as a supplier and continue to place orders?

Have you instructed your teams to request those customers pay in full upon receipt of their sales order?

Also referred to as requesting cash on delivery (COD), you have agreed to serve them under that one single condition, hoping to reduce the risk of not getting paid. You assume due upon receipt payments will crystalize the transaction and avoid confusion and frustration when collecting payments.

However, there are times when receiving a cheque upon delivery does not guarantee your organization a payment for a sales order. Remember, there may be no funds in your customer’s account, causing the cheque to bounce.

What if a competitor extends credit to your customers? Are you willing to give up the accounts to the competition?

As with upfront payments, asking for payment immediately upon receipt of the order may taint the business relationship and your client may choose to do business with a competitor willing to extend credit.

If you want to build and maintain long-term business relationships with your customers, credit terms are an essential tool, and though they involve some risks, there are ways to control them effectively.

If you request upfront or due upon receipt payments on sales orders to reduce the risk of payment default, you may be losing sales opportunities. Instead, to maximize growth, consider offering credit terms, which serve as a differentiator, have a positive impact on your relationship with a new client, and reflect your trustworthiness and the ease with which you do business.

Credit terms are agreements between two B2B companies, where a supplier of goods or services extends credit to customers and accepts deferred payments. This agreement consists of the deferment of a flow of cash into your business, and requires a good analysis of your working capital before implementation.

When you extend credit to customers, you need to define invoice payment terms, provide details about the expected amount, and specify how much time your customer has to pay.

Additionally, you should study your client's financial situation to assess their ability to pay on time. The company's financial statements can be used to estimate its solvency in the short- and medium-term. In particular, you may want to look at their operating cash flow, as well as their debt-to-income ratio, compared to their industry average, especially in today’s environment considering the impact COVID-19 has had on businesses across most sectors.

You can also request a credit report, detailing the payment history of your client to other companies, and a credit score.

Finally, beyond financial aspects, it is useful to inquire about your client's reputation, the reputation of their bank, their business practices, and the background of the company's top managers.

Now that we’ve covered best practices when offering credit terms, let’s briefly look at some of the disadvantages and advantages of this payment method.

• On paper, a credit sale looks like free money to your client. However, failure to meet payment schedules can result in major penalties according to the negotiated terms, as well as damage their reputation and its relationship with your company.
• Credit sales are recorded as an account receivable that weighs on your working capital and cash flow – it is cash that is not collected on the date of invoice. Above all, you expose your business to either late or non-payment, and bad debt is potentially very difficult to recover, especially if your client goes bankrupt.
• Offering credit terms requires significant internal resources, which need to be efficiently managed, particularly in case of complications.

• Offering credit terms is an effective way for you to close new deals, increase your business volume and build loyalty among your clients.
• A credit sale is an important source of financing for your client. Such sales are registered as “accounts payable” on your client's balance sheet and make up part of the company's working capital, which has a direct and positive impact on its cash flow.
• Credit terms can help your clients finance their current operations, especially during certain periods of high activity.
• Credit terms are very useful for new businesses or startups that don’t yet have access to bank loans or sufficient funding.

Yes, there are certain disadvantages to offering credit terms, but the advantages outweigh them if the right tools are in place.

To mitigate the risk of offering credit terms to new customers, equip your business with the appropriate tools, such as signing up for trade credit insurance. This solution provides you with predictive protection and compensation in the event of bad debt, without tainting your new business relationship.

More specifically, a trade credit insurance policy can help your business in the following ways:

• Empowers you to grow sales confidently.
• Is very flexible and can cover all or part of your client accounts.
• Guarantees protection against non-payment or slow payment.
• Enhances efficiency of your internal credit department with fast credit limit requests and ongoing buyer monitoring.
• Expands your financing options by increasing your borrowing base with secure receivables.
• Allows you to trust new customers from the start by offering more flexible and competitive payment methods.

If properly controlled, credit terms are a powerful way to accelerate your growth and improve your client relations from the very beginning with limited risk. Solutions such as trade credit insurance prove very useful and efficient for managing credit sales and taking full advantage of the benefits of credit terms.