Understanding the 5 ‘C’s of trading on credit terms

08/06/2019

Trading on credit terms can be risky business if you don’t take the necessary steps to protect your cash flow from late or non-payment.

If a customer pays late – or not at all – your cash flow can be stretched, making it hard for your business to meet its own commitments. This can lead to severe cash flow problems – one of the biggest causes of business failure.

So, if you’re thinking of offering credit to your customers, make sure you consider these five ‘C’s first.

Character

Before you offer credit terms, first you need to ask yourself who are you offering credit to? And, how likely are they to pay?

Whilst a number of factors will impact the possibility of late or non-payment there are a number of steps you can take to ascertain how risky a customer is. For example, credit circles, credit reports and the Prompt Payment Code can all provide information which will help you to decide if the person you are lending to is a risk.

If the information gleaned from these sources suggests the customer may be a potential risk you can then decide the best way to proceed whilst protecting your business. Perhaps taking full or partial payment upfront is necessary, or maybe proceeding with caution is all that’s required.

Don’t forget that this isn’t just a one-time task – you should check the creditworthiness of your customers before every transaction, not just the first one. Circumstances change and a previously prompt payer may now be experiencing difficulties that will delay payment.

This blog post looks at the pros and cons of credit reports…

Conditions

As well as monitoring your customers you should also keep up to date with how different sectors are currently performing and any challenges or trends that may be affecting them.

Using this information you can then judge if a business is likely to experience any economic factors that could have a negative effect on the business and lead to late payment.

Capital

The order value you are prepared to offer on credit is another key consideration. So, always ask yourself how waiting for this money will affect your cash flow.

Cash flow forecasting is an excellent way of monitoring your incomings and outgoings to allow you to plan ahead for potential shortfalls that could be caused by trading on credit terms.

If your cash flow forecast suggests you may be heading towards a shortfall, you may want to seek additional finance to bridge the gap or consider reducing your credit terms to protect your own cash flow.

Communication

Throughout the credit period communication with your customers is vital – none more so that during the early stages.

Once you have sent an invoice you should always follow this up with a courtesy call to check that it has been received and to confirm your customer’s intentions of paying.

This can help you to spot any potential disputes early on so that you have plenty of time to resolve the issue and ensure payment within terms.

This blog post looks at what to ask in your courtesy calls…

Consequences

It’s also important to plan ahead and think about the consequences should your customer not make payment within the agreed terms.

There are a number of tactics you can try in the event of late payment, including charging late payment interest, outsourcing the debt to a collections agency or even taking the legal route to get what you’re owed.

Whatever route you decide to take these processes need to be clearly explained in your terms and conditions so that your customer knows the consequences of delaying payment. Often simply showing you take late payment seriously from the outset can be enough to encourage prompt payment.