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Payment Terms

Posted by Mike on 6/19/2009 to Just Business

With the economy as it is, it’s more and more difficult / risky to extend credit terms to customers.   But we get prospective buyers contacting us every day, most of whom have never done any business with us before, from small and large entities asking us to ship them something for which they would mail us a payment later.    We just can’t afford to do that.

If you look at the ever-growing list of once strong companies which have filed for bankruptcy protection or closed their doors in the past 18 months, it’s easy to be nervous about a new customer who wants payment terms.   You no longer can look at a situation the way you might have done so in the past…big company or government entity = rubber stamp credit worthiness.  Both large organizations and small ones are having a tough time making ends meet.  Even state, county and city governments are financial stretched thin.  And with more people having lost their jobs, and thinking that going into business for themselves is the way to go, an increasing number of smaller businesses are speculative ventures doomed for failure.  Even banks won’t lend such folks start-up money, and any business that offers them payment terms is rolling the dice.  And in gambling, over time, the person rolling the dice usually ends up in the red.

We’re a small business, and we simply don’t build enough cushion into the profit margin to be able to extend free credit for extended periods of time to customers who pay their bills slowly, or to offset losses from failed accounts.  What’s sad about the situation is that often times, the buyer wants us to give payment terms on a $100 transaction.  They don’t have sufficient credit available on their Visa or Mastercard, or they don’t want to use it.    But they want us to come to the conclusion that they are good for the $100 even though we have no idea who they are, except that they cannot afford to pay $100 before we ship.  Needless to say, there’s not much profit in $100 sales.   And if we did go through a payment term/invoicing/follow-up process, most likely we would eat up all of the profits just in the time and paperwork to secure the payment. 

We’ve also found that in completing credit applications, more and more customers are selectively providing the trade references, offering only those to whom they pay on time or where a friend works who will say they do.   You can’t easily find out about all of the vendors that they are not paying on time.  You can’t easily find out that they are looking to buy from you because their prior suppliers cut them off.  In small business credit checking, you only hear what they want you to hear.  And that’s never a good thing when the person seeking credit is trying to stay afloat.

Certainly, requiring credit cards for purchases before we ship means that we are paying roughly 3% of our sales to the merchant services company that processes the transactions.  But getting 97% of something immediately is better than getting 0% after repeated attempts to receive payment on a past due invoice.  Moreover, if the buyer is in another state, recourse on unpaid invoices is difficult without civil litigation pursued by a collection agency who will take a fat cut of the  sale if you can get anything from the buyer.  It’s pretty simple math; it’s better to sit on inventory than to ship it out and get nothing for it in return. 

All of the inventory in our warehouse has already been paid for by us.  We don’t owe any vendors a penny.  And so when we ship something out, we need to have a reasonable expectation that the person who has ordered the merchandise will be paying for it promptly.  Every day of waiting for that payment is effectively a loan to the buyer, a loan for which we do not charge interest.  Since we are not in the business of charitable gifts of merchandise or credit, we have recently stopped setting up new credit accounts.  Of course, we hope that the economy will soon turn-around to bring things back to normal again.  But even when that does happen, we’ll still be looking at new credit accounts with a very scrutinzing eye.

Mike Lee