Payment Terms Too Generous?

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This is a topic we cannot cover enough here through our newsletter or with our clients!

Managing the credit and collections process is very important for every business and many businesses take their own approach to what this should look like. At minimum, here’s what I’d make sure is in place where you work.

Extending credit to customers can boost sales, but if done poorly, it can also hurt cash flow. How many times do you make a sale to someone and then struggle to collect?

Setting the right credit limit and payment terms ensures your business gets paid on time while minimizing financial risk. As effective AR/Credit leaders, our goal is to maximize cash flow and minimize financial risk.

Here’s how I would do it effectively if you called me about this service I offer:

1️⃣ Set Credit Limits Based on Risk & History

• Review financial statements and credit reports before approving a credit line for any customer. This needs to be a business priority or you’ll be paying out money to a legal team trying to collect pennies on the dollar.

• Start with a low initial limit for new customers or those that seem risky and adjust based on payment history. Review 6-12 months later.

• Set internal credit review policies to reassess limits regularly. I’ve walked in where this doesn’t take place and guess what….these companies carried larger past dues, had bad debt and couldn’t figure out why.

2️⃣ Offer Payment Terms That Protect Cash Flow

• Use Net 15 or Net 30 instead of longer terms to shorten your cash conversion cycle. Companies will ask for longer terms as it’s part of their standard terms and conditions, but that doesn’t mean you have to fold.

• Offer early payment discounts (e.g., 2/10 Net 30) to encourage faster collections as long as this makes sense within your business model. There’s some analysis that should go into this.

• Enforce late fees for overdue invoices to discourage slow payments. I can’t say it loud enough, but if you don’t charge late fees after a threshold of days late, you’re missing the point. Companies who don’t do this can make me cringe at times and then on the AP side of things if they are late they’re being charged 🙂 Doesn’t make too much sense to not make sure you are paid for the work you and your team have done for a customer!

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3️⃣ Automate & Monitor Receivables

• Use automated invoicing and payment reminders to reduce delays, but make sure your team is checking in with customers often. There’s a reason I preach proactiveness when it comes to receivables management.

• Implement a credit hold policy for overdue accounts to prevent further risk. Being able to lock an account down when things get risky is crucial. Don’t be afraid to uphold your policy and stop shipments, reduce the credit limit, or place them on a do not sell listing.

• Regularly review aging reports to spot and address slow-paying customers with your team. A team that’s engaged and willing goes a long way when it comes to managing AR. You have to have a passion to collect money for your business.

4️⃣ Train Your Team on Credit & Collections

• Educate staff on how to assess customer creditworthiness and enforce policies along with other staff like sales and those responsible for shipping.

• Standardize communication scripts for payment reminders and past-due notices. I have done this for years by providing templates for scenarios like 1-30 days late, 30-60, etc. along with demand notes. If you want an example just let me know.

• Align sales and finance teams to balance growth with risk management. The team will always butt heads to an extent, but should 1000% align on making sure the business is taken care of. If your sales team won’t vouch for you and your AR team, I’d have a discussion with them asap. Who pays their salary, right?

I’ll be dropping a newsletter on 1/31 which will be a short recap video covering the month. I’ve been putting a few details together for it already and excited to share with you! It’ll be linked through my YouTube channel, so go follow that now or follow next week!

BG

TLDR:

• Set Credit Limits Based on Risk – Review financials and start with low limits for new customers.

• Use Shorter Payment Terms – Net 15 or Net 30 can speed up collections.

• Automate & Monitor Receivables – Use automated invoicing and regularly check aging reports.

• Train Your Team – Educate staff on assessing creditworthiness and enforcing policies.

Have an idea or a topic you want covered? Email [email protected] with what you’d like help with.

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