Are 60-day invoicing terms right for your business?
It is common practice for vendors to offer credit terms to their buyers, as such agreements provide a further incentive to purchase. However, many agreements include 60-day terms, which for smaller suppliers can present problems after the deal has been done.
Can you survive the term length?
For SMEs, scoring a large contract with a major organisation means a bumper payday, but it’s wise to remember that a credit agreement means a wait to receive full payment. In 60 days, your firm will still need to pay salaries, for goods, and numerous other operational costs without money owed coming in the opposite direction.
Consider the long-term implications of signing a contract before you do so, and whether the capital reserves and resources are there to deliver the goods or service while waiting for payment.
Should the client be given credit?
Part of managing financial risk when offering credit involves deciding whether a client should actually be eligible to receive it. No matter how long or short the agreement is, a buyer with a poor repayment history may still struggle to meet the terms, potentially damaging your own abilities to operate efficiently.
Whether they are big or small, performing due diligence on a client will help you make a decision on whether to give payment terms, and is essential to appropriate credit management. A commercial credit report can be obtained easily, and they also provide a recommended credit limit to help you avoid late payment and bad debt.
If 60-day terms aren’t viable
Should you decide that longer terms aren’t right for your business – and at certain stages of growth this is likely – there are other options. Firstly, it may be in your firm’s best interest to simply decline the contract. Accepting it and then running out of money could have far worse consequences than turning down a deal. The other option would be to seek financing yourself, whether through a business loan to ease cash flow pressures or by negotiating credit terms with your own vendors.
When it comes to invoicing and payment terms, looking ahead rather than focusing on the immediate benefits will help you to recognise potential pitfalls before you’re contractually committed.
Do you want to know how to avoid the common pitfalls which companies fail to overcome when trading abroad and what you should look out for? Go directly to our download center and download the eBook for free!