Should we stop 30 day payment terms?

[chiko930]

I've seen a few posts from other small businesses on facebook saying they're axing 30 day payment terms because so many of their stockists are either struggling or closing and not paying their invoices.

I run a small businesses that has around 200 stockists, most of which are small independents. We have a lot of invoices that aren't being paid and we are starting to struggle.

We have 3 options:

1) Stop 30 day payment terms for everyone
2) Stop giving credit to new stockists
3) Carry on as usual and hope for the best

Does anyone have any advice they could offer or other options to consider?

Is anyone else finding the same issue with unpaid invoices?

 

[simon field]

I've seen a few posts from other small businesses on facebook saying they're axing 30 day payment terms because so many of their stockists are either struggling or closing and not paying their invoices.

I run a small businesses that has around 200 stockists, most of which are small independents. We have a lot of invoices that aren't being paid and we are starting to struggle.

We have 3 options:

1) Stop 30 day payment terms for everyone
2) Stop giving credit to new stockists
3) Carry on as usual and hope for the best

Does anyone have any advice they could offer or other options to consider?

Is anyone else finding the same issue with unpaid invoices?

Your stockists - are they B2B or B2C?

 

[ecommerce84]

We only have around 20 credit customers so we’re in a different position to you but it is something I am more conscious of.

I’d immediately discount your option 3 - that’s not the best idea if you’re already having issues.

How are you handling late payments? Are they being put ‘on stop’ for late payments or can they continue to order.

We offer 14 day terms which brings any problems up quicker - could be worth looking at reducing from 30 days to 14.

I know it’s easier for us as we have far fewer customers but can you look at each customer on a ‘case by case’ basis?

We’ve moved 2 on to payment when ordering as they were repeatedly late with payments. I was nervous they’d jump ship but one of them is actually now our biggest trade customer so it hasn’t pushed them away. It’s also made a huge difference to our cash flow.

 

[Mark T Jones]

Put simply, the best form of credit control is not to give credit.

If you must offer it (and sometimes there is no chouce( then it is essential to have a robust credit control policy- one which starts before you offer credit, not when they are late paying

 

[MOIC]

1) Stop 30 day payment terms for everyone - Offer a discount for 7 day payment
2) Stop giving credit to new stockists - Yes
3) Carry on as usual and hope for the best - That's suicide!

 

[chiko930]

Your stockists - are they B2B or B2C?

They're B2C, I sell giftware

 

[chiko930]

We only have around 20 credit customers so we’re in a different position to you but it is something I am more conscious of.

I’d immediately discount your option 3 - that’s not the best idea if you’re already having issues.

How are you handling late payments? Are they being put ‘on stop’ for late payments or can they continue to order.

We offer 14 day terms which brings any problems up quicker - could be worth looking at reducing from 30 days to 14.

I know it’s easier for us as we have far fewer customers but can you look at each customer on a ‘case by case’ basis?

We’ve moved 2 on to payment when ordering as they were repeatedly late with payments. I was nervous they’d jump ship but one of them is actually now our biggest trade customer so it hasn’t pushed them away. It’s also made a huge difference to our cash flow.

Until now, we usually allow one credit order and then that has to be paid before they can place another one.

Good idea re: 14 days, thanks

We've stopped credit for a couple of consistently late payers, it's more the ones that are going out of business that I'm worried about as that money's gone forever!

 

[chiko930]

Put simply, the best form of credit control is not to give credit.

If you must offer it (and sometimes there is no chouce( then it is essential to have a robust credit control policy- one which starts before you offer credit, not when they are late paying

That's a good point - I wonder if we shouldhave a contract in place that charges interest on late payments.

 

[simon field]

They're B2C, I sell giftware

In that case I’d be clamping down on the troublesome ones.

It’s not like they’re waiting 30 days for payment.

 

[J_A_M_E_S]

We started communicating that we would start to charge for B2B overdue invoices around 18 months ago and it's had a massive positive impact (not only on getting the money in, but a big reduction in time spent chasing the debts).

This is the what we used for the wording/calculation:

Calculate interest on an unpaid invoice - Small Business Commissioner

www.smallbusinesscommissioner.gov.uk

We wrote to all customers, updated our T&Cs and offered the 'carrot' of 2.5% early settlement discount as well as the 'stick' of interest & costs if over 30 days.

 

[scstock]

We started communicating that we would start to charge for B2B overdue invoices around 18 months ago and it's had a massive positive impact (not only on getting the money in, but a big reduction in time spent chasing the debts).

This is the what we used for the wording/calculation:

Calculate interest on an unpaid invoice - Small Business Commissioner

www.smallbusinesscommissioner.gov.uk

We wrote to all customers, updated our T&Cs and offered the 'carrot' of 2.5% early settlement discount as well as the 'stick' of interest & costs if over 30 days.

Assuming this encourages your customers to pay 20 days early you are effectively borrowing money from them at ~57% APR.

I would recommend using Factoring instead - you can borrow against invoices at a much lower rate, they take care of credit control and you get your debts protected to an agreed limit (I once had a payout of £55k)

 

[J_A_M_E_S]

Assuming this encourages your customers to pay 20 days early you are effectively borrowing money from them at ~57% APR.

I would recommend using Factoring instead - you can borrow against invoices at a much lower rate, they take care of credit control and you get your debts protected to an agreed limit (I once had a payout of £55k)

Thanks - I appreciate your alternative view.

We've no issue with the 30 day terms (we get at least that from all of our suppliers). Our solution has drastically increased the number of customers paying in 25-30 days rather than 31-50.

There are still plenty of our customers who pay proforma and/or early without requesting the discount so this system is currently working for us.

 

[Mark T Jones]

That's a good point - I wonder if we shouldhave a contract in place that charges interest on late payments.

It certainly won't hurt

The key thing to remember about collections is that everybody has a pecking order for payments - particularly as times get tougher, ranging from those who absolutely have to be paid on time to those that really don't matter.

The key is to always stay high in that pecking order,videally because they actually want yo pay you

 

[Mark T Jones]

I would recommend using Factoring instead - you can borrow against invoices at a much lower rate, they take care of credit control and you get your debts protected to an agreed limit (I once had a payout of £55k)

There are 3 specific components here, each of which can potentially be taken independently.

Since cashflow itself doesn't appear to be an issue, the OP could potentially look at credit insurance and perhaps credit control

 

[chiko930]

We started communicating that we would start to charge for B2B overdue invoices around 18 months ago and it's had a massive positive impact (not only on getting the money in, but a big reduction in time spent chasing the debts).

This is the what we used for the wording/calculation:

Calculate interest on an unpaid invoice - Small Business Commissioner

www.smallbusinesscommissioner.gov.uk

We wrote to all customers, updated our T&Cs and offered the 'carrot' of 2.5% early settlement discount as well as the 'stick' of interest & costs if over 30 days.

This is super helpful thanks! Did you have to get them to sign a contract with the new charges or just email them?

We have such a low profit margin and are struggling ourselves so can't afford the carrots but will keep this in mind for future businesses

 

[J_A_M_E_S]

This is super helpful thanks! Did you have to get them to sign a contract with the new charges or just email them?

We have such a low profit margin and are struggling ourselves so can't afford the carrots but will keep this in mind for future businesses

You're welcome.

We sent a letter to each customer (email & snail mail) explaining that any orders taken after the 1st of the month following (giving them at least 30 days notice) would be eligible for the early settlement discount (if requested at time of payment) and that fees would be introduced for late payment. Any orders received after the date we chose would be considered to be under the updated T&Cs.

If you can't give the carrot of early settlement discount to offset the interest charges, maybe you can give 1 or 2 months' grace from their next price increase instead?

 

[Ryan Paul]

You need a robust credit policy.
Do not offer everyone early settlement discount.
You'll find the customers who already pay to terms will take further advantage of this.
Those who are struggling will still struggle.

You need more stick and less carrot.

I would suggest F2F meetings with your poor payers.

Are you doing your due diligence on these customers?
Introduce credit limits if not already.

 

[IanSuth]

You could write/speak to all saying something like "Due to inflation we are having to raise costs, however we are aware of the impact this will have on you customers, therefore to reward those loyal customers who always pay swiftly, at the same time we raise prices there will be an equivalent early payment discount for those paying within 7/14 days thus keeping their costs the same, on the flip side any going past 30 days will now be subject to the late payment charges attached"

 

[scstock]

Do not offer everyone early settlement discount.
You'll find the customers who already pay to terms will take further advantage of this.

My first accountant gave me this advice 27 years ago!

One of the many disadvantages of settlement discount is you will get customers who take the discount when paying later than the date they should to benefit. This leaves you either having to chase relatively small sums or just sucking it up as too much hassle.

 

[Chris Ashdown]

We told new customers that we only open credit facilities after about 6months of regular orders, it worked well, every buyer these days have company debit/credit cards that fast and easy way to pay

After 6 months of trading they will have grown use to paying with order and just keep on doing so

 

[Ian J]

There are 3 specific components here, each of which can potentially be taken independently.

Since cashflow itself doesn't appear to be an issue, the OP could potentially look at credit insurance and perhaps credit control

What he said

 

[Ian J]

I would recommend using Factoring instead - you can borrow against invoices at a much lower rate, they take care of credit control and you get your debts protected to an agreed limit (I once had a payout of £55k)

I am a factoring broker and earn my living by placing businesses with factoring companies but I don't believe that this will help you with your problem.

A factoring company's credit control for a smallish business with loads of customers will just be to send out computerised letters and you can do that yourself. Likewise they are unlikely to underwrite credit limits on 200 customers with small balances as it would be uneconomic for both them and you.

As Mark has suggested the answer is probably a more efficient credit control policy yourself done mainly over the phone and if you don't have the manpower get someone in for an afternoon a week to do it for you

 

[JEREMY HAWKE]

We are in an industry where traditionally customers would pay on 30 to 60 days sometimes 90 or more

As much as I would like to finance @Ian J s next sports car I also have ambitions of my own ?
So we scrapped giving credit along time ago The website was bringing in new customers daily and we needed funding to pay for this work to be done . So now its payment on booking

We have 6 customers who are PLCs that we give credit to

 

[swankypants69]

As a small retailer myself, so from your customers point of view

I would go

1. No credit at all for new customers (start as you mean to go on)
2. Polite email reminders a week in advance of 30 day invoices coming due
3. Discount of X percent for proforma invoices or 7 day payments
4. A bit of leeway for long standing customers with a track record of always paying, even if they are late (I as a customer fall into this category ????)
5. A polite phone call from “accounts” department always does the trick with me, I HATE being put on stop, none of my big accounts would put me on stop for being a couple of weeks overdue, as I always get squared up in the end ????

 

[Ryan Paul]

My first accountant gave me this advice 27 years ago!

One of the many disadvantages of settlement discount is you will get customers who take the discount when paying later than the date they should to benefit. This leaves you either having to chase relatively small sums or just sucking it up as too much hassle.

This is very true.
I would only introduce Prompt Payment Discount if it meant retaining an account and not as a means of incentivising slow payers.
Their incentive should be, Pay to terms or your account will be placed on stop.
There will be larger Key Accounts who you afford some leeway however if this is impacting on cashflow then you need be having a sit down with them.

 

[Mark T Jones]

As a small retailer myself, so from your customers point of view

I would go

1. No credit at all for new customers (start as you mean to go on)
2. Polite email reminders a week in advance of 30 day invoices coming due
3. Discount of X percent for proforma invoices or 7 day payments
4. A bit of leeway for long standing customers with a track record of always paying, even if they are late (I as a customer fall into this category ????)
5. A polite phone call from “accounts” department always does the trick with me, I HATE being put on stop, none of my big accounts would put me on stop for being a couple of weeks overdue, as I always get squared up in the end ????

A useful perspective.

I would however be very cautious on your point 4 - that line between being flexible and putting yourself at increased risk of bad debt.

The classic long firm fraud revolves around building a good credit rating, before maxing every line, having a fire sale and disappearing into the night.

Not that many customers will actually be fraudsters, but established businesses who find themselves in difficulty will behave in a depressingly similar way. Rather than admit they are in trouble they will try to trade through it extending every line available (and trade creditors are the easiest target) before finally giving up.

Never assume a customer will be OK because they've been good so far - periodic reviews are essential to good credit control

 

[Ryan Paul]

Never assume a customer will be OK because they've been good so far - periodic reviews are essential to good credit control

Very important that you are reviewing filed accounts on an annual basis and measuring risk /reward.

 

[swankypants69]

I would also add that a sole trader has a lot more to lose than a limited company! You can pursue the sole trader whereas the Ltd can disappear……..

It used to annoy me that a supplier wouldn’t give me credit as a sole trader as I can’t be checked as easily as a limited company or for whatever reason, but I don’t lose any sleep over it now

 

[Ian J]

Very important that you are reviewing filed accounts on an annual basis and measuring risk /reward.

The problem with that is that the Balance Sheet that you are reviewing will show you the position on one particular day a year or more ago

 

[Ryan Paul]

The problem with that is that the Balance Sheet that you are reviewing will show you the position on one particular day a year or more ago

There is that however if the accounts are not satisfactory then I've found myself requesting accounts for the past 6 months.
Their willingness to provide will help you make an informed decision.

 

[Mark T Jones]

One thing I haven't seen mentioned here is retention of title - does your contract have an ROT clause?

I have an associate in a fairly similar environment to yours - they are red hot on credit control (but still take the odd knock).

He says that one of the keys is variation in tone, from mildly threating to witty.

2 approaches which have proved successful are

1. 'have we done something to offend you?'
2. 'We understand you may be struggling, how can we help?' (this is particularly effective for small balances).


The other key point is to be completely consistent and to do exactly what you say you will do.

 

[Ryan Paul]

He says that one of the keys is variation in tone, from mildly threating to witty.

2 approaches which have proved successful are

1. 'have we done something to offend you?'
2. 'We understand you may be struggling, how can we help?' (this is particularly effective for small balances).


The other key point is to be completely consistent and to do exactly what you say you will do.

These points are valid and separates good credit controllers from the chocolate teapot type.
You should not accept a client's response if it is laden with excuses. Take their comments on board but get some form of commitment with them knowing the onus on them to pay and not just on you to be patient.

 

[Paul Kelly ICHYB]

If you are going to change your payment terms, now is probably one of the best times to do it from a financial and marketing position.

Most online businesses work on a pay now basis and to move from 30 days to 7 days/on delivery or prepay/on order, as a way of improving cashflow and fighting off price increases, is an extremely strong message.

However, it does depend on your products and sector - the more unique you are, the better chance you have of not losing customers.

 

[Ian J]

2 approaches which have proved successful are

1. 'have we done something to offend you?'
2. 'We understand you may be struggling, can Ian Johnston of Factoring Solutions help?

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