The baseline payment terms that a company should consider offering to its customers is the standard terms offered in the industry, which may range from immediate payment to 60-day terms. The key issue is to give the appearance of offering competitive terms, so that prospective customers will not be turned away. However, it is quite acceptable to modify these baseline terms considerably if a customer appears to present a credit risk.
One solution is to shorten the terms of sale. For example; a customer may plan to place 10 orders for $3,000 each within the company’s standard 30-day terms period, resulting in a required credit line of $30,000. Reducing payment terms to 15 days would mean that the customer should be able to purchase the same quantity of goods from the company on a credit line of just $15,000. This approach works only if a customer is placing many small orders rather than one large one, the orders are evenly spaced out, and the customer’s own cash receipts cycle allows it to pay on such short terms.
Another possibility is to offer a leasing option to customers, which allows them to make a series of smaller payments over time. Though the company could offer this service itself and earn extra interest income on the sale, this still leaves the risk of collection with the company. An alternative is to engage the services of an outside leasing firm, so the company receives payment from the lessor as soon as payment is authorized by the customer, thereby eliminating the collection risk in the shortest possible time frame. A company can also earn a small interest percentage on the lease as part of its outsourcing agreement with the leasing company, usually in the range of ½ to 1 percent. This approach is most effective when the company and the leasing agency have come to a joint leasing agreement well in advance of a customer sale, so the sales staff can present the leasing option to the customer as part of the initial sale presentation. This frequently gives the company a distinct advantage in making the sale. Of course, a lease is a viable alternative only when the company is selling a fixed asset that the customer intends to retain.
Another approach is to leave the payment terms alone, but to have an individual with personal assets guarantee payment. The personal guarantee makes collection easier, since the signer knows that he or she is responsible for the amount of the receivable, and will make sure that this invoice is paid before other unsecured invoices. If possible, obtain a joint guarantee from the individual and his or her spouse.
By doing so, the company can get around some state-level community property laws requiring collection only if the spouse also agrees to a guarantee.
Finally, consider leaving the payment terms alone, but obtaining credit insurance on the invoice. This is a guarantee by an insurance company against customer nonpayment.
Credit insurance is available for domestic credit, export credit, and coverage of custom products prior to delivery, in case customers cancel orders. If a credit insurance policy stipulates a maximum credit limit per customer, the insurance company must make the decision to increase the credit limit, or the company can take on the uninsured risk of granting extra credit. If a customer is considered by the insurance company to be high-risk, it will likely grant no insurance at all. Also, goods being exported to countries with a high perceived level of political risk will not be granted credit insurance. The cost of credit insurance can exceed half percent of the invoiced amount, which varies considerably by the perceived risk of each customer. The company does not have to absorb this cost; where possible, consider rebilling it to the customer, who may be willing to pay it in order to obtain a larger line of credit than would otherwise be the case.
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