Credit Terms
The conditions under which you extend credit to customers, including limits and payment expectations.
Definition
Credit terms define the conditions under which you allow customers to pay after receiving goods or services. They include: credit limits (maximum outstanding balance), payment terms (when payment is due), credit application requirements, and consequences for non-payment.
Extending credit involves risk—you're trusting customers to pay later. Credit terms should balance customer accommodation with protection. Tighter terms for new or risky customers, more generous terms for established ones with good payment history.
Why It Matters
Credit terms significantly impact cash flow and bad debt exposure. Generous terms win customers but tie up cash and increase risk. Strict terms improve cash flow but may deter some buyers. Finding the right balance for your industry and customer base is essential.
Credit policies should be consistent and documented. Ad-hoc credit decisions lead to inconsistency, potential discrimination issues, and difficulty enforcing collections. Establish clear criteria for credit approval and term assignment.
Examples
- 1
A supplier offers new customers Net 15 with a $5,000 credit limit, upgrading to Net 30 with higher limits after 6 months of good history.
- 2
A B2B company requires credit applications for any order over $1,000, including business references and bank information.
- 3
A wholesaler's credit terms include: 2% late charge monthly, suspension of shipments when 60+ days past due.
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