A customer may ask you for credit (or payment) terms; if they are a large customer they may demand credit terms as a cost of doing business with them. It’s not unusual for big customers, like supermarkets, to ask for long terms, like 90 days and more. They know they have the extraordinary distribution power that you want, and you will pay them for it.
You supply the goods and they pay you 90 days later, well after they have sold what you supplied. Asking for credit terms improves their cash flow, because they have your goods or services for some time before they’ve paid you for them. If they sell them and take the money immediately, then they have used your money to make their money.
It's quite common to ask a supplier for 30 day terms. You may ask the same from your suppliers.
It's your risk if you give a customer credit. If they go bust while they’ve got your products, and they haven’t paid you for them, then you become a creditor to the insolvent company. The company administrator is duty bound to pay creditors as much as the insolvent company can (after their fees) before their funds are exhausted, but it will certainly be pence for every £ owed, and may be nothing. All the hard work and expense and you end up out of pocket.
Giving credit is trading something – time for money - and it has a value. If your customer is new to you, you may ask them to pay before delivery or on-delivery, or use a payment guarantee, like a letter of credit. Over time, if they pay ‘on-the-nail’ each time you may offer them credit terms, and you may want something in exchange, like higher volume orders, simpler delivery conditions, changes in warranty commitments or something else that has value to your business.
Remember, offering credit costs you money and you will want something in return. It can be a very useful way to drive increased sales, but it's important to factor the cost of money into your margin calculations.
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