Credit period

A credit period is the time period over which credit is granted and can range from a few days to an unknown duration. It is ultimately up to the creditor to set the framework for how long a credit period should be.

The creditor basically has the freedom to decide how much credit to provide. While some companies offer no credit at all, others choose to offer very long credit periods. It's up to the individual company.

Theoretically, credit periods should be customized to the individual debtor/creditor. Some debtors shouldn't get any credit at all, while others can get long credit periods.

Credit period as a tool

In any credit extension, there are two essential parameters or tools that a company should work with: the credit period and the credit size.

The credit period and the size of the credit are among the factors that determine the framework of a credit and control the risk associated with a loan or credit.

Any form of credit involves a risk that the credit will not be repaid. A debtor may die, go bankrupt or experience financial difficulties during the credit period, which may prevent repayment.

By regulating the size and length of the credit, you can try to limit the risk of loss, as longer credit periods and larger credits theoretically involve a greater risk.

Credit period as a competitive parameter

In addition to the credit period being a credit management tool, it also serves as a strong competitive parameter - especially in industries where credit is an important factor.

For many industries, such as the food industry or the craft industry, providing credit to their customers is crucial.

In such industries, credit means that craftsmen can buy materials from a local timber merchant, use the materials at the customer's premises, receive payment from the customer and only pay the timber merchant when the work is done. This gives the craftsman a great liquidity advantage as they don't have to pay for the materials themselves. In this way, tradesmen will naturally choose suppliers that offer the longest credit period, where payment can be deferred as long as possible.

Credit periods should never be the same

Credit periods should never be the same for all customers, but should be adapted to the individual customer, their industry and similar circumstances.

Many companies make the mistake of offering a fixed credit period—e.g., 7, 14, or 30 days—to all customers. This can pose an unnecessary risk. The company should always assess each customer individually and set an appropriate credit period based on, for example, a credit rating or the customer's key figures.

At Collectia, we have developed Qatchr, an online tool for obtaining credit information that you can use in your credit assessment. The tool can, among other things, provide recommendations for credit size and length.