In Australia, small to medium-sized enterprises provide about $1.3 trillion in business-to-business credit. Trade credit allows consumers to access goods and services that they may be unable to under other circumstances. While trade credit is standard practice, suppliers often deal with a time-consuming and outdated process. Unfortunately, without innovation, your company is more likely to end up with an overdue invoice when working with trade credit.
Moreover, only about one in five businesses have formal policies in place to deal with this. At Pencil, we provide innovative software to help you offer trade credit and to receive payment on time. Let us tell you what we know about B2B credit.
What Is B2B Trade Credit?
B2B trade credit is a business-to-business contract that allows a customer to pay for goods without having cash upfront. Instead, the customer pays you at a later date. In most cases, trade credit benefits the buyer.
As the seller, offering trade credit helps you build a strong relationship with your customers. It helps you network and increase customer loyalty so that buyers may later choose your company again. The biggest disadvantage is that you do not receive money right away. Worse over, you risk an overdue invoice. However, you can reap the benefits of trade credit without risking your company’s revenue.
How Can You Avoid an Overdue Invoice?
Every company wants to collect money before an invoice is overdue. By offering trade credit, you already agree not to accept money upfront. Odds are you don’t want to wait longer.
Your contract should be clear about the payment agreement. Spell out the payment terms, including how long a company has to pay you and what happens if it does not pay. There should be no room for any argument or dispute.
Never use vague language or company jargon. Everything you invoice should be clear. In the unfortunate circumstance where a disagreement arises, you do not want the customer to have an argument against paying.
Trusting your buyers is part of being able to offer trade credit. Low-risk customers will rarely leave you with an overdue invoice. Using a digital platform, you can assess a buyer’s credit score without the need for paper applications.
For example, PencilPay provides accurate information about a buyer’s credit information. The credit score can tell you a lot about a company. Assess the score and history prior to agreeing to provide credit.
How do you plan to collect payment? For a quicker payment, try to be flexible. Invite customers to pay in various ways. For example, online payments and credit cards help customers pay quickly.
In addition, try to keep most of your invoices electronically. The quicker you can send invoices and reminders, the better. Do not make it difficult for your customers to contact you. Put all of your contact information in the contract and on the invoice.
How Should You Collect an Overdue Invoice?
Once an invoice is overdue, send polite reminders to the customer. While you do not want to harass your buyers, you do want to ensure that they know the bill is due.
If polite reminders do not help, you may have to branch out to other means to collect payment.
If a customer cannot pay, offering a payment plan can benefit both of you. First, payment plans allow you to recover the money you’re owed. Second, it provides flexibility to the customer that may be advantageous to you in the future. Businesses appreciate working with a supplier that understands companies may run into challenges with their finances and need extra time to pay off a debt.
Without a payment plan, customers may feel more stressed. After all, many buyers want to pay for your goods and services. If your company approaches the situation in a kind, understanding way, you are more likely to gain customer loyalty.
Payment plans allow the customer to pay the balance in several installments over an agreed-upon period of time. Our software provides you with a way to create an installment plan by selecting the invoices, the amount you want upfront, the frequency you want payments and the number of payments you expect.
Letter of Demand
After trying other friendlier methods to receive payment, you may decide to send a letter of demand. This should include the following:
- A correct invoice
- A due date to pay the invoice
- Accurate information about the purchase
- An interest rate if applicable
- Date and signature
- Relevant supporting documents
You may also choose to include a warning that you may seek legal action if the buyer does not pay the debt. Take the letter of demand seriously and remember that if you did not try other means to collect the debt, you may inflame a dispute with it. Remain as polite and formal as possible within the letter.
Debt Collection Agency
Try to look at debt collection agencies as the last resort. Only consider them if you have given friendly reminders, started informal negotiations and already sent a letter of demand. You pay a fee to the debt collection service and the service attempts to recover the money for you. Once you hire a debt collection agency, you are telling the buyer that you have decided to hand the matter over to someone else. When a debt collection agency takes over, your relationship with the buyer will likely remain strained.
Use Software To Avoid an Overdue Invoice
Providing financing options requires specialized processes. If your company does not have checks and balances in place, you may provide credit to a high-risk customer. Unpaid bills are a hit to an SME’s revenue.
At Pencil One, we provide an easy-to-use digital platform for our members to manage trade credit and avoid the frustration of an overdue invoice. Our software integrates with accounting and inventory software for a solution that doesn’t require you to change your entire system. Get in touch with us to find out more about how to use PencilPay to your company’s benefit.