Payment terms: Are large customers calling the shots at your expense?
February 12, 2010 by Jared BilskiPosted in: Benchmarking, Cash flow, In this week's e-newsletter, Latest news & views, Management issues, collections
Expect your largest customers to request you to do a lot more for them in the upcoming months.
Many companies are reporting that their larger customers are increasingly dictating unfavorable terms — according to a survey by the National Association of Credit Management (NACM).
Next to the state/future of the economy and slow-paying/delinquent customers, unfavorable terms by larger customers was listed as the top concern by credit professionals.
Although credit pros have no control over the economy, you can keep larger customers with unreasonable demands from putting your company in an uncomfortable position.
While no one wants to lose their big accounts, there is a limit to how far your cash flow should be stretched.
One move to take: Determine in advance exactly how far your company is willing to bend when it comes to payment terms — that way you’ll be prepared with an answer if a large customer puts on the full-court press.
How does your A/R department handle customers who make unfavorable — or unreasonable — demands about payment terms? Share it with us in the Comments section.
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Tags: A/R department, Credit professionals, Large customers, National Association of Credit Management (NACM), Payment terms, Unfavorable terms
February 11th, 2010 at 12:24 pm
As Credit Manager I require customers who deviate from our standard terms of N30 to submit future payments via electronic means. This allows my company to avoid mail time and signature delays.
All customer requests are reviewed against current payment trends and only if the account is current will a change in terms be considered.
February 15th, 2010 at 3:32 pm
My company also has standard N30 day terms. We offer N45 on foreign accounts and require them to pay wire transfer. Discount is not something that is normally offered.
Past due accounts are never granted extended terms. Any notices received by customers that they are extending our terms are reviewed on an individual basis and in most cases our N30 days are accepted. In rare cases we come to an agreement around 40 days.
Also, our credit application states that the terms accepted when the application is signed trumps any customer purchase order. That helps us when customers change the terms on their PO, but fail to contact us ahead of time.
February 18th, 2010 at 12:12 pm
As a buyer the suppliers have been over charging for years and with the High CPM’s the suppliers make they can afford to extend payment terms. Look at the comments by Margie… Net 30 for domestic accounts and Net 45 for foreign accounts. What the Hell? Why would they allow foreign suppliers to tkae 50% longer to pay? No wonder companies are out sourcing to foreign countries the stupid ass USA companies will help to bank roll them. I can assure you that Asia lets Asia take longer terms than they allow the USA. Please America get a grip on this and take control because not everyone can work in service.
February 18th, 2010 at 1:19 pm
By adding specifics re: terms in the agreement with the customer, you can identify when ‘the clock starts”. Example: Net10 from date of Invoice; Net 30 from date of invoice.
Have also implemented emailing Invoices to reduce additional turn-around time.
February 18th, 2010 at 1:34 pm
My company deals with a large convenience store chain. We subcontract from a subcontractor. When the chain cut the first subcontract’s payments, they cut ours. It was basically said ” if you want to keep doing business with us, you will accept this as full payment”. My boss wanted to keep the account, so he accepted the payment.
February 18th, 2010 at 1:34 pm
I was always taught Terms were an aspect of price, and were to be kept as confidential; to avoid any collusive activity. I have always thought that Providing more attractive terms to one customer in a specific class of trade and not others in that same class was contrary to the Clayton Act? Unless a specific competitive situation could be cited?
So basically all these larger customers are coercing their suppliers into breaking the law along with them becuase is Capitalism ethics can’t hold a candel to profit
February 18th, 2010 at 2:55 pm
I have also begun faxing and emailing invoices to our customers. But then you have the excuse “I never got it”, from those few that you always have trouble with. It would be nice to be able to say “if you don’t pay, you won’t get our services.” But you can’t always do that; especially if your services come a dime a dozen, from someone else.
February 18th, 2010 at 2:59 pm
I am the credit manager for a commercial construction company. As we all know right now everyone is having it hard, and this industry is no different. I first verify that the issue is not an internal issue then I dig a little deeper. In our industry you usually are “paid when paid” so if they didn’t get it we don’t get it. I first off find out why they haven’t been paid. Is this something my customer caused or are you dealing with a poor paying owner? I offer, on many occasions to call the owner myself to see what I can do to help my customer which in return helps me. In most cases once you eliminate all excuses the only thing left is to be paid. We all win. You have to also understand that you can’t “choke” someone out over one issue. Be reasonable and understand the situation. I have found that the customer you extend the olive branch to at a time when they need it becomes some of your best customers in the end. You can’t put a price on loyalty.
February 18th, 2010 at 3:46 pm
Our manufacturing company ships to foreign and domestic manufacturers and they continue to try to put the squeeze on us. When terms get stretched out, we put customers on pay in advance, credit card or UPS COD. With international container shipments, we add “x” days to our normal N30 terms to help cover transit time. We work with our customers, even offer consignment, but we are not a bank.
Because our products are required for our customers to operate, we can tighten the screws when a customer gets out of line. A word of caution however, a bankruptcy court ruled that because we kept a tight reign on a customer that went bankrupt, we had received special treatment from them and were forced to give some money back. Mind you, we would not allow the customer to get past due over 60 days and enforced a credit limit to keep our risk manageable. We did our job, we kept them in production, and then got screwed by the court.
Businesses that rely on us know that if someone else misses a shipment, they can call on us to bail them out. That is the type of relationship you don’t want us bean-counters to mess up.
February 18th, 2010 at 3:54 pm
Our 45 day term policy with foreign accounts is the result of our material taking up to six weeks by container on a freighter to reach our customers. We would not ask our customers to pay for anything that they have not yet recieved. That goes for US and foreign customers.
We also encourage faxing and emailing of invoices.
February 18th, 2010 at 4:28 pm
Ron, we have had the same happen to us. A customer has been put on Cash in Advance and they send a payment, we ship an order, they go bankrupt and we end up giving the payment to the court and of course our material is gone.
I will take this scenario over having uncollectable accounts. It is rare for us to write off an account.
I do have a general question for those posting on this blog. Do you find credit reports useful and how do you justify spenidng the money when you really can’t prove how much money you saved by running a credit credit check and making a customer pay in advance because of their bad credit rating?
February 18th, 2010 at 4:47 pm
Margie, credit reports can be only as good as the paper it’s printed on these days. Even the best customers, with the best credit, can go belly up. But it’s certainly better knowing what the credit report says, before product is given.
February 18th, 2010 at 5:01 pm
I agree with Ann. I utilize a premier company for credit information for domestic and foreign. ANY credit history is only as good as those contributing; however, it does give you some insite on what has been occurring with them within the last year or two. Particularly helpful when dealing with private-owned businesses. Publically-traded businesses can pad their annual reports. Can also find recent change in ownership or if business has been converted to a Holding Co. Of particular interest is the number of domestic companies that are ultimately owned by a foreign business.
I feel my interaction with our customers on regular basis helps me pick up on changes that are occurring within the company. Helps me ward off taking a serious hit.
February 18th, 2010 at 5:07 pm
I have very little confidence in the big name commercial “Credit Reports” especially given the banking/finance fiasco that led to the bail outs. Most data I see that relates to our operations is out of date. Virtually all business took a big financial hit in 2008-09 and your big customer may be on the ropes before the big guys even have a clue. Why pay for old data when you can get your own current stuff for free?
For us, even in the bankruptcy case, we relied on our internal and external sales people to keep us advised of market conditions, business opportunities and customers in their areas. It’s also nice to know when your competitors are having supply chain trouble and you might be in line for some additional business. Know your customers.
If you are part of an industry association, the association may have credit reporting that can clue you in as to why you are receiving queries from customers you could never get. Your competitor may have reported them as slow or no-pay. Don’t get burned.
When setting up new accounts, we do require a credit app and we do inquire of the vendors. Terms are directly related to anticipated volume with credit limits set. Pay history then becomes the key to modification of terms. We seldom have to write off an account. A little knowledge is a good thing.
February 18th, 2010 at 5:20 pm
BTW, we supply our field sales force with a report of slow-pay accounts every week so that they are not surprised when one of their customers goes on credit hold. That gets us immediate feedback and information that you ain’t gonna get from D&B. In this economy our sales people don’t want to lose either the sale or the commission. They get hungry, too.
On a compensation note, we are giving our sales team “stimulus pay” to help them through the economic slowdown and to retain our trained sales force when commissions are down.
February 18th, 2010 at 6:13 pm
It sounds like you work in a good company that cares about it’s people. Not too many employers care any more.
February 18th, 2010 at 6:45 pm
In our 20 year company history, we have always been paid – eventually – with one exception, a customer went bankrupt, leaving us with a bill that we had to write off.
The above said, I have never seen things so bad in AR / AP. Our material suppliers (much larger companies than us) are placing us on credit hold on day 31, but if we did that to our customers, we would drive some of them out of business. Still, even our best customers are paying between 35-45 days.
All of this puts a large strain on our line of credit. Thankfully, we have one. We wouldn’t survive without it.
February 19th, 2010 at 10:48 am
Upon receiving terms extension from a large customer our sales team holds a meeting w/ the customer to discuss. We hold the customer accountable for their request by asking the tough questions. Why do you need extended terms? is your company in trouble? Often time the answer is that it was a corporate initiative. To which we access their company and find ways we can save them money instead of extending terms. It helps us to partner w/ our customer and grow our business. Rarely do we deviate from net 30 terms that are stipulated in our signed customer agreements.
We also use a large credit reporting agency and find the tool is as good as you put into it. We provide accurate information to them and hope others do the same, thus giving us reliable data. This data, coupled with close communications w/ our sales teams (as Ron noted) provides us a balanced picture of a customers health, wealth, and growth potential.
In instances where it looks like term extension is inevitable, we notify our customer that pricing will increase to meet the term they are requesting.
February 23rd, 2010 at 9:55 am
I’ve used a credit agency to ascertain our customers DSO when they ask for extended terms. It’s pretty awesome to go to a customer and say “Your DSO is 43 days but you are asking for 60 day terms from us? What are the terms to your customers, looks better than 60 days to me”. Of course, I try to do this more subtly as to not piss them off. To me, the credit report offers valuable information for negotiation.
April 16th, 2010 at 1:20 am
Wow… great information.