Table of contents5 sections
Trade credit makes selling easier. The client can take the goods or use the service and pay only after 14, 30 or 60 days. For many B2B buyers a deferred payment term is standard, and sometimes one of the conditions for starting the collaboration.
From the seller’s perspective, however, it means financing the client from its own funds.
The company has to buy the goods first, pay for transport, pay salaries, settle with suppliers and cover operating costs. The money from the sale, on the other hand, may arrive only after several weeks, or even later if the business partner does not keep to the deadline.
We know what it is like when the large value of invoices issued gives a sense of good sales, but the account balance does not allow you to settle the nearest payables comfortably. The problem is then not a lack of revenue. The problem is the gap between the moment the cost is incurred and the moment the money is actually received.
Safe trade credit therefore does not mean giving all clients the same payment term. It requires assessing risk, setting a limit, monitoring its use and taking the business partner’s real behaviour into account in the cash flow forecast.
Trade credit makes selling easier. The client can take the goods or use the service and pay only after 14, 30 or 60 days. For the seller, however, it means financing the client with its own funds.
Why can trade credit threaten a company’s liquidity?
Trade credit is not a bank loan, but its financial mechanism is similar. The company hands the client a certain value and, for an agreed period, waits for the funds to be returned.
If there are many such transactions, a business may have a significant part of its capital frozen in receivables.
Payment gridlock arises precisely when business owners do not receive money from business partners on time. UOKiK points out that delays can cause a domino effect: a company that has not been paid may itself struggle to settle its obligations to other entities.
High sales do not mean available cash
A company may sell goods worth 500,000 PLN in one month, but if most invoices have a 60-day term, the funds are not yet available.
At the same time it has to pay:
- suppliers,
- salaries,
- taxes and contributions,
- transport,
- warehousing,
- restocking,
- instalments and leases,
- other operating costs.
If the terms granted to clients are longer than the payment terms owed to suppliers, a financial gap arises. The company has to cover it with its own capital or external financing.
Clients with different levels of risk get the same term
A common mistake is to set one payment term for all buyers.
Yet clients differ in:
- length of the collaboration,
- regularity of payments,
- value of the orders they place,
- number of open invoices,
- scale of earlier delays,
- financial condition,
- importance to the company’s portfolio,
- options for securing the transaction.
A new client the company does not yet know should not automatically receive the same terms as a buyer who has paid on time for several years.
The limit exists only in the contract or in the salesperson’s memory
Even a correctly set trade credit limit does not protect the company if nobody monitors how much of it is used.
A client may have at the same time:
- invoices past due,
- invoices awaiting their payment date,
- deliveries not yet invoiced,
- orders in progress,
- further orders awaiting approval.
If the sales system does not link this information, a salesperson may accept another order even though the total exposure to the client has already exceeded a safe level.
The formal term does not show the real date of receipt
A client may have a 30-day term on the invoice but in practice regularly pay after 42 days.
If the cash flow forecast takes only the formal date into account, the company assumes the money arrives earlier than it actually will. This leads to wrong purchasing decisions and an over-optimistic assessment of available funds.
That is why a safe model should analyse not only the contract terms, but also the business partner’s real payment habits.
How to grant trade credit safely?
The process should begin before the first sale with a deferred term and continue throughout the collaboration.
1. Assess the business partner before granting deferred payment
Before making a decision, it is worth collecting basic information about the client and the planned transaction.
You should check, among other things:
- how long the company has been operating,
- the scale of the planned purchases,
- whether the registry and contact details are consistent,
- what the history of the collaboration so far looks like,
- whether the client has reported payment problems,
- whether they are suddenly placing a much larger order,
- whether the client’s industry is particularly exposed to seasonality,
- whether the order can be partly secured with an advance payment.
The assessment should not end with a simple division into “good” and “bad” clients. Its outcome should be choosing suitable terms:
- prepayment,
- partial advance payment,
- short payment term,
- standard trade credit,
- individual limit,
- additional security.
2. Set a credit limit, not just a payment term
The term determines when the client should pay. The limit, on the other hand, determines how large a total exposure the company is prepared to accept.
For example, a client may receive:
- payment term: 30 days,
- trade credit limit: 80,000 PLN.
The use of the limit should count not only overdue invoices, but the entire current exposure: receivables not yet due, deliveries not yet invoiced and confirmed orders.
It is worth basing the limit on:
- the average value of purchases,
- payment history,
- the state of the collaboration,
- the margin on sales,
- the possibility of recovering the goods,
- the seller’s available working capital,
- the concentration of sales on a single buyer.
The limit should protect the seller, not merely make it easier for the client to place further orders.
3. Match the term to your own cash cycle
Before granting a 30-, 45- or 60-day term, you need to check when the company itself has to pay for delivering the sale.
If the supplier expects payment after 14 days and the buyer gets 60 days, the seller finances at least 46 days of the difference.
- the supplier’s payment term,
- storage time,
- delivery date to the client,
- the moment the invoice is issued,
- the declared payment term,
- the client’s historical delay,
- operating costs falling within this period.
In transactions between private business owners, the payment term should as a rule not exceed 60 days, although the regulations provide for certain exceptions and dependencies related, among other things, to the status of the parties and the content of the contract. The terms of a specific transaction should therefore also be assessed against the regulations in force.
4. Monitor the client after the limit is granted as well
An assessment done at the start of the collaboration can quickly go out of date.
Warning signs include, among others:
- delays gradually getting longer,
- more frequent requests to postpone the due date,
- a rise in the number of partial payments,
- no response to reminders,
- a sudden increase in order values,
- an increase in the number of open invoices,
- a worsening payment trend,
- exceeding the granted limit.
When such signs appear, the company can:
- reduce the limit,
- shorten the term,
- demand an advance payment,
- hold further deliveries,
- split the payment into stages,
- secure the next order,
- start reminder communication earlier.
Safe trade credit therefore requires continuous management, not a one-off approval by a salesperson.
How did we solve this problem at Administy?
While running agencies, we also granted clients what was in effect trade credit.
We did the work before receiving the full fee. The team spent time, subcontractors issued invoices, we bought licences and bore the project costs. The client, meanwhile, received an invoice with a deferred payment term.
So the mechanism was the same as in trading: first we bore the cost and delivered the value, and only later did we receive the cash.
At first we looked mainly at the formal invoice term. If a document was to be paid in 30 days, that was the date we used in planning.
Over time we noticed that individual clients behave differently:
- one paid a few days before the due date,
- another regularly two or three days late,
- the next delayed the transfer by a dozen or so days,
- yet another paid small invoices on time but settled larger amounts later.
So the formal term was not enough to predict the actual inflow.
That is why at Administy we started analysing each business partner’s payment history separately.
The system can take into account:
- the number of days of delay,
- the client’s average delay,
- the history of earlier invoices,
- behaviour with invoices of different values,
- the direction of change: improvement or deterioration,
- the value of current receivables,
- the number of documents awaiting payment,
- the confidence of the prepared forecast.
Administy analyses, among other things, indicators related to delays and receivables, the business partner’s payment trend and behaviour with invoices of different values. On this basis it supports the assessment of when funds can be expected in practice.
Thanks to this, in the cash flow forecast we do not have to assume that every client will pay exactly on the day shown on the invoice.
If a business partner regularly pays 12 days after the due date, the financial plan should reflect exactly that behaviour. This lets you see earlier whether the expected inflows will cover:
- salaries,
- subcontractor invoices,
- taxes,
- fixed costs,
- purchases necessary for further projects.
Combining the client’s history with current receivables also lets you detect a change in behaviour faster.
If a buyer has so far paid on time but their successive delays are growing, this may be a signal to:
- limit further exposure,
- shorten the term,
- change the limit,
- collect an advance payment,
- start reminders before the due date,
- talk about new terms of collaboration.
The most important change was moving from the approach:
“The client has 30 days to pay”
to the approach:
“The client formally has 30 days, but based on the history of actual transfers we expect payment after 39 days”.
It is this second piece of information that is needed for responsible liquidity management.
Trade credit should support sales, not finance risk without a limit
A deferred term can be an important sales tool, but it requires control. The company should know whom it is financing, in what amount, for what period and what effect this has on its own payables.
Safe trade credit rests on four elements:
- assessing the business partner,
- an individual limit,
- monitoring its use,
- a forecast based on real payment history.
This way the company can support sales without taking an uncontrolled risk of losing liquidity.
Administy helps analyse business partners’ payment history, monitor open receivables and take real inflow dates into account in the cash flow forecast.
Book an Administy demo and find out how to control trade credit better before growing sales start to freeze the company’s cash.
