How Important Are Your Terms And Conditions When Offering Credit

Many businesses of all sizes in Australia are happy to give credit, services and products to companies they do business with every day. It’s common for Large SMB’s to provide credit to their clients and it is progressively becoming more normalised as it is the way the business works today. Granting credit is actually a way of making investments in the existing clients as you are effectively investing money in them with the premise that you will get a return on it. However, you will first need to assess which of your clients is actually worth your investment and time.

Not every small business in Australia today provides credit. Many will only make sales in cash. In several situations, this may cost them clients and sales since we live in a society that is driven by credit. For example, a supplier might want to place quite a large order from your company. However, they may not always have funds ready to pay for it upfront. This order can go to a competitor unless you are willing to extend credit to them. Small businesses might face trade-offs as they will need to balance the benefits of higher sales against the expense of providing credit.

In most cases, small businesses will have two basic types of clients. They will have trade credit clients or B2B clients. Trade credit is extending credit to the firms that you deal with. Smaller businesses would also have consumer credit clients or B2C clients, which are the normal public customers they do business with.

What Would Make Up A Company’s Credit Policy?

When an organization works on a cost and benefit analysis and makes an important decision of extending credit to their customers, then it would be vital for the company to establish strong procedures for collecting accounts and credit. An effective credit policy would normally be made up of three different parts:

Terms of the Sale-

These terms for credit clients would state how the company will sell its services and products. Will the company provide credit or only make cash sales? This decision would be made through a credit analysis process and the company would then determine which client can be given credit. If the company decides on extending credit to another firm, then the next step would be to establish various terms. The terms would include the discount that you want to provide the client, a discount period and your credit period. These terms could look like: 2/10 and net 30. What this means is that the company offers a discount of 2% to the clients if they pay them back in ten days. If the client doesn’t take this discount, the outstanding amount would be due in thirty days.

Credit Analysis-

A Company would have to determine how they will provide credit to other businesses under the credit analysis. They could use various methods such as credit scoring, evaluating the credibility of the business and getting credit reports.

Collection Policy-

Once the company decides to extend credit to other businesses, it would also have to design a suitable collections policy which can be used for monitoring the credit accounts. In most cases, two approaches are used by companies. They may use the aging schedule for accounts receivable or an average collection period.

The ACP or average collection period allows the company to know the average number of days it would take for collecting the credit accounts. This ACP can be compared to other companies in the industry as well as the ACP from earlier years. This will provide the company with a large amount of useful data to work with. When the ACP rises, the company may have to resort to aggressive collection on the credit accounts.

The aging schedule for accounts receivable is also a very valuable tool. This tool will allow the business to see the percentage of the credit accounts that are late, the delinquent accounts which are now considered uncollectible and more. Between both of these tools, it would be quite easy for a company to understand and maintain control over its credit accounts while taking care of problems which could affect the cash flow of the business.

Terms of Trade

Establishing clear and effective Terms of Trade is very important since it will ensure that your business operates smoothly. These terms will ensure that your money would be available to you when you need it. It will also establish a transparent relationship with the firms you deal with and allow you to collect your debts in an effective and straightforward manner.

Documentation for Terms of Trade

It is very important to have effective and clear Terms of Trade with the firms that you deal with throughout your relationship. Companies that do not have these terms correctly worded and in place would be at a major disadvantage. Effective Terms of Trade would ensure that you will be paid in a timely manner.

Since every company is different, it would be important to tailor your Terms of Trade to ensure that it suits your business. Having documentation supporting your credit policy and created by qualified and experienced legal practitioners in Australia will be important. The documentation must include all the specific information that would be needed by your business.

Benefits of the Terms of Trade Documentation

Having your terms of trade in place would mean:

  • Easy resololution of any unpaid accounts and disputes your business may have in the future

  • An improved cash flow and a reduction in the expense of monitoring these payments

  • Offering the advantage of title reservation till the goods or services are paid for

  • Charges imposed for late payments

  • Idemnity from the potential liabilities that may be associated with debt collection proceedings in the future

  • Protection against loss of any profit

Tailored Documents

It is also important to ensure that the documents you create for your organization are personalized or tailored to your businessneeds. Some of the documents that you would require for terms and conditions include:

  • Variation and Estimate forms

  • Indemnities and Personal Guarantees

  • Sales Order forms

  • Quotation forms

  • Work authorization forms

  • Credit applications
  • Terms and Conditions for the trade documentation

Establishing clear terms and conditions for offering credit will definitely make a huge difference to the way credit is managed in your organization. This is important as cash flow needs to be carefully monitored. Being able to offer credit from your business is a valuable tool. However, you need to make sure you are protected if you are offering credit and have clear and concise guidelines that are followed.

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