Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at [email protected]

Dear Thea,
Why does it seem like giving customers extended payment terms is a "go-to" sales answer to save a sale or keep a customer happy? If the customer asks for 60 days, 90 days - no problem! Those extended terms aren't free! My sales rep says they have to meet a competitor's offer or we will lose the sale.
Signed, No Free Rides in San Francisco

Dear Free Ride No More,

So, I was thinking about calling my mortgage company and telling them another finance company is courting me and is offering me a smoking hot deal. The other company is giving me an additional 60 days to pay on each and every one of my mortgage payments. I would like my company to meet its competitor's terms or lose my business. Did I mention there would be no additional interest on any of those payments? Think my mortgage company would go for it? What about the car company? Do you think they would give in?

In fact, I can't think of another industry where it is acceptable/expected/optional to negotiate extended terms, preferably before the sale. But let's be honest, some of those customer's negotiate those terms AFTER the sale (and when I say "negotiate," what I really mean is they just change the rules).

It is not that I am against free enterprise and cutting the best deal possible. Sometimes, it may be a necessary or practical idea to extend terms. There is a cost and a downside. We all know the upside: Get the sale, save the customer, be the hero because you can say "yes" instead of "no." There is another side of that shiny coin: The soft underbelly of the extended term. The seedy, dark, shady side. The cost of money side that is rarely talked about. I can hear that sales pitch now: "But Thea, if we don't meet 120 days, they will purchase the materials from our competitor and then they are in the door. We may lose them forever."

Forever? Really? That is a long time and this industry is pretty fickle. One day you are the hero, the next day you're just the dope whose company cannot find their butts with both hands, then back to hero. I usually just sit there, smiling, appearing to believe everything I am being told, and waiting to see what they come up with next.

Once my little bundle of sales information is finished talking, I look them straight in the eye and tell them I don't care what term they offer the customer. Terms are part of the sales process and as credit my main concern is whether they can pay. Okay, that is a lie. I do care. I will try to coach the salesperson through why these terms are a questionable idea. My number one question: How much profit do we have in this sale? The answer, ironically, no matter what, is always, "A lot. We are making bank. We have plenty of margin in there." No punkin', I need an actual number. A number you can substantiate.

That usually causes some rumbling about how they need my approval for these terms. No, you actually don't. Deciding on what payment term and length of payment term is part of the sales process. But, I would like you to consider where credit does come into play on this. Let's talk about the impact of those extended terms.

What does it impact, asks you? Well, it impacts our purchasing power, reduces cash flow, increases costs, and increases credit risk to name a few. In other words, it affects profitability.

  1. Purchasing power: Giving a customer extended dating will negatively impact a customer's ability to purchase from you unless they have a large enough credit line to accommodate the extended dating. Selling someone who has a $50K credit line $50K today and giving them 90 day terms will not allow any additional sales for that period. You have maxed that customer out. So, did you really accomplish anything? They most likely are going to purchase something during that extended period; it just won't be from you.
  2. Reduced cash flow: Extended dating allows the customer to take longer to pay those invoices which has a negative impact on YOUR company’s cashflow. Since cashflow is dependent upon turning sales into cash, the longer it takes for the cycle to complete, the more stress it places on cashflow.
  3. Increased costs: With reduced cashflow it is necessary to borrow more money to fund YOUR company's cashflow. Borrowing costs you money and reduces profit.
  4. Increased credit risk: The longer a customer has to pay an invoice, the larger the A/R balance and the longer time until the invoice comes due. Who knows what can happen to a business in 90 or 120 days? Bad stuff happens all the time. Do I sound a bit like Debbie Downer? Credit philosophy, my friend: everyone pays you - until they don't.
  5. Profitability: Covered above. What is the margin on this sale? Does it take into account the cost of time?

Do I believe other suppliers or distributors offer extended terms? Yep, I do. I heard of one distributor who is offering six month terms with a large credit line. No payments for six months!! Sweet! I am heading over there later to acquire some fun new upgrades for the barn. Distributors feel they have to offer extended terms based on peer pressure. One brainiac thought it was a good idea and now we are all stuck with it. Or a manufacturer offers a "pass though" program and you either support it or lose that sale to your competitors.

I can understand why a customer would ask for a little more time, such as 45 - 60 days (or net 2nd 10th prox). Contractors may worry about the ability to pay in a shorter window on some projects. A credit manager worries the contractor will get paid, use the money somewhere else, and not be able to pay at some future date.

Now that the proverbial cat is out of the bag, extended terms aren’t going away. What is a credit manager to do? Work them to your advantage. Ask lots of questions, reel them in, or limit them where you can, and continue to educate, educate, educate. #knowyourcashflow