“Buy now pay later” is a proven business model that allows companies to retain their competitive edge in a challenging market. Retailers and other businesses across the world are increasingly offering B2B trade credit and alternative payment options.
While offering credit gives your business multiple advantages, it is important to know how to mitigate the risks of delayed payments.
Why offer B2B credit?
Apart from allowing businesses to gain a competitive edge, offering credit is a great way to encourage B2B customer loyalty. Credit offers a convenient way for businesses and suppliers to make payments and shows that your business trusts and values them. This helps build a strong, long-term relationship with these customers.
When companies get credit extended on good terms from your business, it can encourage loyalty. These companies are more likely to prefer your business for their future requirements. If you offer more favorable B2B credit terms as compared to your competitors, you can draw more B2B customers towards you. In addition, you can solidify your competitive edge by offering trade credit to businesses that are not looking to take a business loan.
Your B2B customers gain more purchasing power as a result of your trade credit. This means they can afford to buy more of your services or products, leading to stronger sales volume, larger customer base and increased profits.
Clearly, offering business credit offers considerable competitive advantages for businesses.
Why do you need a business credit application template?
For growth-oriented businesses, offering credit is a proven way of scaling their client base and sales volume. Given the risks inherent in this approach, businesses need to carefully balance the potential for higher sales against the risk to their cash flow.
According to Illion‘s research data, payments in Australia are late by an average of 10.4 days, reflecting that Australian businesses receive their payments almost 11 days overdue. According to another estimate, payments are delayed by 26.4 days on average. With a 30-day credit term, this translates to a two-month payment delay.
A new survey reveals that businesses write off 5% of B2B sales based on trade credit as uncollectible. As per this survey, delayed B2B payments increased in 2020, with 54% of firms reporting past-due invoices.
This ‘delay,’ which leads to a constriction of cash flow, is the reason for the failure of so many small businesses. Small businesses in Australia are owed $26 million in unpaid invoices. Business owners spend an average of 12 days a year collecting their dues. To counter this, business owners clearly need strategies – such as better credit control, AR automation, integrated online payments, and the ability to review debtors’ risk profies.
Here are some risks businesses face when offering credit:
Risks of offering credit to B2B customers
- Cash flow impact – The standard credit terms range from 7, 21 to 28 days. Waiting for payments can reduce your business’s cash flow, impacting your ability to purchase replacement or other products from suppliers. Businesses opt for debtor finance to manage this risk. Failure to service the debt can impact your credit rating while potentially risking bankruptcy.
- Reduced profit margin – Credit sales can also impact your profit margin. While the impact is only felt in the P&L ( profit and loss) statement, businesses may fail to consider the impact when pricing their services and products.
- Large debts – If your business is exposed to large transactions, unpaid debts create a huge dent in your financial health.
These issues can combine to increase the risk of business failure. Per an estimate, 90% of small businesses in Australia fail because of cash flow problems. In a report, the ombudsman of Australian Small Business and Family Enterprise highlighted that small businesses are owed $20,000 or more in late payments. About 14% are owed $100,000 or more as late payments.
Cash flow problems have ripple effects on all aspects of running your business, impacting your ability to pay your suppliers on time. This can prevent you from taking advantage of any early payment discounts while damaging your reputation.
Most businesses lack the resources required to chase down their payments. Given the day-to-day tasks of running the business, most businesses have very limited time to dedicate to chasing the payments they are owed.
Balancing these risks against the multiple advantages of offering credit requires a strategic approach. While conducting a credit check on your B2B customers, setting clear payment terms is vital. A comprehensive credit application form can help you capture crucial information that you can leverage to assess credit suitability.
Based on your assessment, you can specify different payment terms for various B2B customers. For instance, you can offer longer credit terms for reliable suppliers while asking upfront payment for those who habitually delay their payments. You can also set a credit limit which is the maximum credit amount your business will offer. Defining the credit limit helps ensure your accounts receivables are funded and protects your cash flow. Based on the credit history or payment history of B2B firms, you can choose to specify the credit limit for each customer.
A digital credit application form simplifies the process of applying for credit and getting approved while reducing errors in specifying credit terms.
Key business information needed to extend B2B credit
Contact Information – The mandatory field in the form captures vital contact details, including the business name, shipping and billing address, tax identification, the business owner’s contact information. The credit application form must include fields to capture:
- the name of the business
- landline number
- mobile phone numbers
- email addresses
- business address
- Accounts payable contact
Business details – Your credit application form needs to capture full business details to ensure you know whether you are dealing with a trust, sole trader, association, company or partnership. Make sure the form captures these specific details of the business:
- Australian Business Number (ABN)
- Australian Company Number (ACN) in case of a registered company
- Registered business name
- Names of directors
- Registered business address.
- Contact details and name of trustee in case of a trust
- Length of time the business has been operating.
Financial information – This information is vital to assess the firm’s ability to pay you. Ensure the credit application form captures these details:
- Bank details, including bank account name and BSB (Bank State Branch)
- Bank location
- Accountant’s details
- Recent financial statement reviewed/audited by an accounting firm
- Permission to carry out a credit check.
- Debts and assets
- Profit and Loss statement.
Trade references – The form should capture trade references from a minimum of three other suppliers and their contact details ( full business name, mobile number, ABN, and email address).
Directors’ Guarantees – Ensure the credit application requires individual directors of companies to provide a written guarantee that they will clear the debts in the event their company is not able to pay. In case the business goes into bankruptcy or liquidation, you can hold the directors responsible for the payment of outstanding debts. Your credit application form needs to capture contact details, such as email address, mobile number, and street address of directors.
Payment terms – Set the payment terms in the credit application form in direct, simple, and unambiguous language to avoid misunderstandings and disputes. These fields should specify
- The limit of credit you provide
- The period of credit; usually ranges from 7, 14, to 21 or 28 days of purchase.
- Types of payment you accept such as cash, debit or credit card, cheque, online payments, BPAY, or EFTPOS
- Late payment fee that applies beyond a standard credit term. This can range from 30 days to 60 days.
Terms and Conditions – This is a vital section in the credit application form that ensures your B2B customers have read and understood your terms and conditions. Your company’s credit team and legal teams can work together to form a credit policy and specify these terms. For instance, it can include that your company will perform a credit check and make a decision on extending credit after
- checking the company’s registration with an ABN Lookup
- contacting the referees to assess payment history
- carrying out a credit check
- obtaining a cash sales history
- evaluating the business’s liabilities, assets, and debts
- securing a guarantee.
This section can also include information on
- how and by when you will inform the firm of your decision
- that you reserve the right to decline credit
- and chase debts in case of failure of payments.
If you decide to extend credit, ensure you specify the credit limit, default terms or the penalty, credit terms, and other conditions. You can also include a section on the collections methods you will use. This explains the actions your business will take if the firm fails to pay. Businesses typically will send an invoice initially, followed by reminders, and if this fails, they can take legal action and engage a collection agency to pursue payments.
Download the Credit Application Template
Offering B2B credit and ensuring you receive payments on time can be challenging without a streamlined process. Download the free online credit application template to make the process seamless and error-free.
You can also use our Credit Insights & Online Credit Application platform – try it out and get 3 free business credit scores