Credit terms
An increasing number of businesses are extending credit to their customers, typically to increase revenue and sell more goods.
Credit allows customers to purchase an item without necessarily having the liquidity to do so at the time of need.
Besides credit from companies to their customers (B2B, B2C or B2G), you can also get credit from the bank, which is often called an overdraft or loan. It's basically about the same thing: being able to buy a product from a company.
Credit terms are an essential part of extending credit, as they set the overall framework, terms and conditions for the credit being extended. From time to time, credit terms are also referred to as credit terms.
If it's a loan, we talk about loan terms.
Why credit terms?
Most larger companies have credit terms, but small businesses can sometimes struggle to have credit terms - or at least to have good enough ones.
The credit terms set the overall framework for the credit: any installments, interest rates, conditions for getting credit and what happens if the credit is not repaid on time.
Without credit terms, neither the debtor nor the creditor(borrower or lender) knows the terms of the credit, which can cause problems in both the short and long term.
Credit terms reduce risk
All credit carries a risk of not being paid. The reasons can be many and can range from financial deterioration to the death or bankruptcy of the debtor.
That's why it's important to have the right credit terms, which can help reduce risk by ensuring the right customers get the right credit.
Basically, credit terms can help ensure that good customers get more and longer credit than bad customers.
It is therefore important that the credit terms also define how to obtain credit and thus set the necessary requirements for obtaining credit.
For example, a minimum of three years of positive operations, positive equity or similar can be required.
Relevant legislation
Of the relevant legislation regarding credit terms, the Credit Agreements Act is particularly important to know if you as a company provide credit to your customers.
Why extend credit?
There are many reasons to offer credit to your customers. Basically, all companies provide credit if they allow a customer to pay the invoice in advance of delivery - for example, with a 7 or 10-day payment term.
But many companies and industries offer much longer credit than that - up to several months of credit.
A typical reason for granting credit is industry-oriented, as many industries have a tradition of offering large and long credits, such as the craft industry and the food industry.
Providing credit allows your customers to buy and maybe even resell the item before it has to be paid to the supplier. This provides a number of cash flow benefits for the business. Companies will therefore often seek out suppliers that offer the best credit terms in terms of length and size.
