In the B2B market, there are various systems that make business transactions smarter, smoother and more efficient. One such system is what we know as credit terms, also referred to as trade credit. It is an agreement between a buyer and supplier that allows the buyer to purchase and receive their goods while making payment at a later date – usually between 30 to 90 days after the receipt is issued. While most B2B players are familiar with trade credit, another equally important concept for buyers to understand is credit management.
Credit management ensures that the supplier can protect themselves against late payments by buyers. Credit management strategies are vital to maintaining a business’s financial health – and suppliers often put it in place to reduce the risk of negative cash flow.
While it’s designed to protect suppliers, it’s just as important for buyers to understand what is credit management. This knowledge will give them greater insight into effectively managing their finances and supplier relationships.
What Buyers Need to be Aware Of
Payment Policies
Credit management is highly personal, and as we know, it’s an essential component in B2B ecommerce. Businesses often create specific products, promotions and yes, pricing for different customer segments.
Personalisation means sellers can speed up sales cycle, target customers with the right products, and nurture prospects into loyal customers. It also allows them to reward high-value customers with special promotions and perks such as…
- reduced delivery fees and product pricing
- early payment discounts
- extended credit terms
This means that the better your portfolio and reputation as a customer, the more perks you’ll get.
Assessment and Measures
The element of risk is always present when suppliers opt to sell their products and services on credit. Some customers may pay their invoices late while others may not pay at all. While there is no fail-safe means to avoid mishaps, there are precautions suppliers can take to prevent this.
To ensure their credit management is on track, suppliers often exercise several measures to determine credit terms for their customers. Things they would commonly do include:
- Evaluate customers on their merits. New and occasional customers may only get standard terms while long-term customers get extended terms. If you’re new to the business, you may want to focus on strengthening your relationship with your suppliers.
- Payment history. Customers with a history of being on time with payments, sellers will be more comfortable with providing them extended terms. However, if you decide to request for extended terms, make sure to back up your reasoning as some suppliers may see this as a sign of financial instability.
- Credit check. Some businesses will perform a credit check on their customers or request that they fill in an account application form. This information will often be used to determine a customer’s credit limit and payment terms.
- Late payment penalties. Businesses may charge steep fees for buyers who fail to make their payments on time, and some might even blacklist you if the late payments happen frequently. This is a costly mistake, as it can lead to reputational damage if your supplier is well-connected.
Being in Conflict with a Business’ Credit Management Policy Can Negatively Affect Your Creditworthiness
Creditworthiness is when you or your business is seen as suitable to receive financial credit. If the creditor feels that you can be trusted to pay your debt on time, you are considered as creditworthy. In B2B, your creditworthiness plays a significant role in determining whether a supplier will extend credit terms to you.
Late or missing payments are a red flag. If you continually fail to settle your debts in time, it damages your creditworthiness.
As we mentioned earlier, suppliers are a tight-knit community and are often well-connected to one another. They often exchange experiences, so if you get into the bad books of one supplier, word is going to get around.
Continuous late payments to suppliers can also put your credit rating score at risk. If your supplier reports your payment history to a credit bureau, it makes it difficult for you to apply for loans in the future.
Credit Management Best Practices for Buyers
Now that you understand what is credit management and how it works, remember that all suppliers operate differently. Suppliers will tailor their credit management plan to their needs, their industry and the customers they service.
There are, however, several ground rules for buyers to protect your relationship with your suppliers.
This starts by always reading the contract. Many new entrepreneurs enter into trade credit agreements without fully understanding what it entails, so be sure to do your research thoroughly.
Pay attention to the terms discussing..
- the delivery and payment options
- payment periods and payment due dates
- all applicable conditions
- consequences in the event of late or non-payment of credit terms
Determine if you are able to meet these terms before signing. If you’re unsure about certain conditions stipulated in the contract, ask your supplier to go through it again.
Credit terms are really only beneficial for buyers that are able to pay early or on-time. For many types of businesses, it’s common to experience a decline in sales during certain times of the year resulting in limited cash-flow. Ask yourself if you’ll still be able to meet your payments on-time during these periods as the last thing you want is to take out a loan in order to pay off another.
If you’re fully intent on getting that trade credit, doing a cash flow projection ahead of time is crucial to ensuring that you’ll be able to meet your payment deadlines and remain in good standing with your suppliers.
And Finally, Don’t be Afraid to Negotiate
Within reason, of course. As mentioned, suppliers often tailor their payment policies to their customers which means that it’s possible for you to negotiate better credit terms with them. This is especially if you’ve been working together for a long time and trust has been established.
Here are three tips for negotiating payment policies with your supplier:
- Plan ahead. Think about what you’re going to ask for before you reach out to your suppliers. A cash flow projection will help you understand what payment terms you can meet and this will give you a starting point to begin your negotiation. Also take the time to review your customer rights in the contract, study the cancellation clauses and if necessary, speak to a lawyer to help you understand the specifics of the policy before approaching your supplier.
- Communicate early. Communication is better than radio silence so if you find yourself in a position where you can’t make payments on time, reach out to your supplier and notify them sooner rather than later. Instead of abruptly stopping your payments, speak to them to discuss the possibilities of a renegotiation or deadline extension. Giving them fair warning is not only considerate but it will save you the possibility of getting slapped with harsh penalties.
- Be reasonable in your demands. The trick here is to ask for slightly more than what you need in hopes of meeting in a comfortable middle. For example, if the agreement states that payment should be made within 30 days, ask for 60 days. You may end up with 45 days in your contract. At this point, also research other suppliers to determine what the average is to help you make comparisons.
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Driven by our intent to continuously evolve in our ability to support Malaysian SMEs across Malaysia, buyers can also sign up for Dropee Credit, allowing you to immediately start sourcing your products and make payment within 60 days.
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