Giving Your Customers Credit Terms

Offering credit terms to your customers can significantly boost your sales and foster long-term business relationships. However, without proper management, it can also lead to cash flow problems and increased risk of non-payment. This guide provides actionable advice to help small business owners navigate the complexities of extending credit terms effectively.

By implementing structured credit policies, conducting thorough credit checks, and using automated reminders you can improve cash flow, strengthen customer relationships, and boost business growth.

Why Is This Important?

Even if you currently have no collections or cash flow problems, you are unlikely to avoid this problem for long. Late payments rose 13% during 2023 and over 50% of all B2B Payments were late. Non-payment is an issue too – 7% of all B2B invoices never get paid, according to an annual survey by Atradius.

But this isn’t just about playing defense – managing customer credit can be a competitive strategy too. A survey by Dun & Bradstreet reveals that 63% of small businesses offer credit terms to their customers. Doing so can increase sales by 20 to 30%, according to SageWorks.

How to Implement Customer Credit Terms

To implement credit terms effectively, start by documenting clear credit policies. Decide what your terms, limits, and criteria are for extending credit. Make sure you know what the impact on your cash flow will be if 100% of your customers follow your policy.

Not all customers deserve credit, of course. Assess customer creditworthiness using credit checks and references before offering credit terms. Determine appropriate credit limits for each customer and always use written agreements outlining the credit terms. 

A written credit offer to your client must include payment due dates and any penalties for late payment. Consider getting a signature from your client on the term sheet (which can help you with collections later!)

Get Into a Routine

Rolling out a policy is just the first step. Making sure you live by the policy is key. For each invoice you send, follow these 7 steps:

1. After sending the invoice, call your customer’s A/P department on day 2 to make sure the invoice was received by the right person. Ask them when they expect to make payment and agree on the amount and due date.
2. Send an email reminder a few days before the due date. This can be an automatic email from your accounting system.
3. As soon as the invoice is overdue, call your customer contact to ask if the invoice was paid. Solve any miscommunication problems quickly.
4. If the customer is unable to pay, negotiate new terms. Any negotiation should require some immediate payment, even if it’s small. Future collections are easier if the customer acknowledges the debt and makes an initial payment.
5. For any payment outside of your standard terms, consider halting further work for the client. Don’t dig their hole any deeper!
6. If the client is still not meeting their obligations, send the account to an outside collections company as soon as you can. There’s no reason for your staff to waste time collecting bad debts – turn it over to the pros.
7. Finally, get in the habit of reviewing your detailed A/R Aging Report weekly. It’s easier to fix a problem before it gets out of control.

Partner With Us for Better Credit Management

By adopting these strategies for offering and managing customer credit terms, you can enhance your cash flow, minimize non-payment risk, and create a more reliable financial foundation for your business. Implement these practices to improve your accounts receivable process and overall financial health. Clear communication and robust credit management practices can turn credit terms from a potential liability into a strategic asset. Want some help? Schedule your free business analysis today, and let us help you set credit management policies that work for you and your customers.