The Payment Terms Dilemma

The Hidden Pitfalls of Offering Extended Payment Terms in Wholesale Business

To be competitive today, offering extended payment terms to wholesale customers is a necessary evil. However, this seemingly customer-friendly approach often leads to a host of challenges, resulting in late payments, increased debtor days, and mounting bad debt.

In this article, we delve into the complexities of extended payment terms, highlighting their impact on businesses and showcasing a real-life case study that illustrates the hurdles faced by product sellers.


The Payment Terms Dilemma:

Businesses providing payment terms often find themselves in a predicament. While extending credit to customers is essential for retaining clients, it frequently transforms into a situation where sellers are treated like interest-free lenders.

Striking a balance between customer satisfaction and ensuring timely payments becomes a significant challenge.


Data Insights and Disturbing Trends:

In an extensive study covering 100 product sellers across diverse sectors, alarming trends emerged.

73% of stock is sold on credit terms, but nearly two-thirds of these invoices are paid late.

A staggering 4% of invoices take over 120 days to collect, with half of them never recovered.

The most concerning aspect lies in the 30+ day payment bucket, where invoices are paid, on average, 26 days late, representing a significant portion of turnover and overdue amounts.


The Case Study: Navigating Payment Challenges Successfully:

Consider the story of a distributor selling specialty food brands to major retail groups, supermarkets, delis, cafes, and food stores.

With 650 active trade customers and 1100 monthly orders, the company faced a daunting challenge: handling payments efficiently while managing diverse payment terms.


Strategic Solutions and Implementation:

To tackle the issue, the company implemented a series of strategic solutions:

Centralised Ordering: Funneling customers to a central platform streamlined the ordering process.

Automated Billing: Prepaid and some 14-day customers provided their bank details, enabling automated billing.

Checks and Balances: For 30-day customers, stringent checks, including signed applications and detailed accounts payable contacts, were implemented.


The Power of Automation:

By adopting a proactive approach and leveraging PencilPay, the company transformed its payment landscape.

Features including automated account applications, easy access to credit history, securely stored payment methods, and flexible payment options, ensured seamless transactions and a reduced administrative burden. 


Key Takeaway:

Whilst providing extended payment terms can attract customers, you need the right policies and technology to maintain profitable relationships. This isn’t just a choice; it’s a necessity.