Home – New Forums Money matters What are fair and reasonable credit terms?

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  • #967675
    Steven Hudson
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    I was having a parma and pot with two of my buddies last night, both run very successful business in two different markets from each other.

    One of my mates starting complaining about how some of his customers are expecting extended trading terms i.e. payment 30 days from the end of the month when the invoice is received.

    This is very new to him as he has always maintained a very good control over his debtors. However he is starting to lose some big contracts due to his non acceptance of these new trading terms which are starting to enter his industry.

    So from a F/S trader point of view what are fair and reasonable trading terms with respect to credit to customers?

    Small story: I worked for Brambles a few years back and we was considering buying one of the airports the government had up for sale, one of the ways we considered raising cash was collecting our debtors 7 days earlier and paying our creditors 7 days later this was calculated to = $100,000,000 of cash in the bank.

    Cheers

    Steven

    #1028075
    jasonm
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    My terms vary depending on the customer, usually 7/14 days. I was offering 30 but it killed my cashflow.

    Then there are the customers that pay on their own schedule, one of which being 45 days from invoice. It was upfront and they are a big company so if I want the work I have to expect not to get paid before time. Its OK to manage, just a matter of making sure I’m doing work for others that pay quicker to keep the cashflow up.

    If you are wanting to build your customer base offering better terms than a competitor is a good way to attract customers, just make sure you credit check them.

    #1028076
    Dardee
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    Mine are 14 days and I chase anything outside these terms.

    #1028077
    CruzAccountant
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    Take care taking big clients who are on extended payment terms. You may very well run into cashflow problems as you fork out money on expenses even before you send out the invoice, then you receive the money 30 days after the invoice. There could be nearly two months delay between spending the money, and receipt of income.

    There are various ways around this though, eg Bank overdraft, line of credit, extending Accounts Payable, reducing payment terms for Debtors.

    I guess “soloists” who have no staff may be more flexible with payment terms, unless they require a certain amount of money in order to make business expenses and (say) mortgage repayments.

    Each business is unique, and the best way to look at this is to do a projected cashflow of taking on the client.

    #1028079
    Credit Manager
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    Hi Steve,
    As far as “fair and reasonable” trading terms is concerned, i guess you could look at it from two perspectives.
    Fair and reasonable for the seller, and fair and reasonable for the buyer.

    From the seller’s point of view, the biggest factor would be the cost associated with waiting to be paid, factors such as interest on an overdraft, staff costs, and expected profit all play a part in determining how long a business can wait to be paid.

    From the buyer’s point of view, fair and reasonable may mean long enough for them to sell a product and make a profit before having to pay for it.

    From a risk point of view, the longer an account remains outstanding, the less likely it is to be collected. According to research presented by a large debt recovery agency here in Adelaide, an account that is 60 days old is 15% less likely to be recovered than an account that is payment on delivery, so should the seller trading on 60 day accounts raise the price by 15% to compensate?

    This then all goes out the window when you bring in market conditions such as what are your mate’s competitors offering.

    If competitors are able to offer the same product or service at the same price, and allow longer to pay, maybe your mate should look at other ways of competing, such as service, to avoid losing business.

    Just my two bobs worth
    Cheers

    #1028080
    Jake@EmroyPrint
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    This is a very good post and I will be watching it with a keen eye.

    I currently don’t have a problem with bills being paid and my customers trading accounts vary depending on their circumstances & what they require.

    I find it’s normally the solo / small businesses who are trust worthy and pay their bills on time & the larger companies who require a few phone calls / emails.

    – Jkae

    #1028081
    Steven Hudson
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    Paul Reynolds, post: 33274 wrote:
    This then all goes out the window when you bring in market conditions such as what are your mate’s competitors offering.

    If competitors are able to offer the same product or service at the same price, and allow longer to pay, maybe your mate should look at other ways of competing, such as service, to avoid losing business.

    Hello Paul thanks for your two bobs worth, very interesting.

    Paul, regrading market conditions this is an unusual position, the service provider (my mate) has a unique offer and there is no one else in the world with the same offer, his service standards are first class.

    However the customer is equally unique as they run a yearly event which probably has the largest audience in the world and they can take or leave suppliers who will not PLAY on their terms.

    Secondly, while there is no other company with the same offer, it is not a show stopper for the event, It can go on with or without.

    Your point regarding 60days is a good reality check for all, make sure we control our debtors and jump on those which are getting out past 60 days.

    Cheers

    Steven

    #1028082
    Mark@Unique
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    Hi All,

    We have a general rule of 7 days, however we have larger contract clients who pay 30 days.

    As we are primarily a service company we need cash…I’ve tried telling our security officer’s we’ll pay them in 30 days…it doesn’t work :-), so 7 day terms is a must for cash flow.

    The other thing to be mindful of is what it is costing you to have monies outstanding, a 30, 60 or 90 debt could be eating up all you profit.

    Not to mention if you are a small business how long can you fund a new client (debt) for? An example of such an experience…in the early days of our business, we won a large contract…fantastic!! The champagne was running everybody was so excited, then I realised I had to find 40k to cover the first 30 days!!

    Hey Paul, you highlight a very important point….

    From a risk point of view, the longer an account remains outstanding, the less likely it is to be collected. According to research presented by a large debt recovery agency here in Adelaide, an account that is 60 days old is 15% less likely to be recovered than an account that is payment on delivery, so should the seller trading on 60 day accounts raise the price by 15% to compensate?

    #1028083
    King
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    We have just had one new client complain about 30 days payment. Reason was they got their invoice on the 30th, and they complained that they would then only get to the following month to pay and why didn’t we wait till the 1st to send the invoice so they have till the end of the FOLLOWING month to pay!!

    They could not accept that despite 30 days being reasonably generous, that it was 30 days from date of invoice, not 30 days from end of month. It is a small but important few words to make sure you have on your invoices.

    #1028084
    Chris Bates
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    Oh King, I feel your pain.

    I had a client once that worked like that.

    had! past-tense ;)

    #1028085
    ndreamer
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    i get 30-50% of my money up front before i accept any job, i give most of my clients 15 working days to pay the remaining amount. I do have some clients that pay slowly or that i know will pay slowly like large company’s, government etc so i factor that in to the quote.

    ideally i would love to get it to 7 days or pay on completion, it would make things so much easier for me and a bit cheaper for the customer.

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