With the looming national lockdown due to commence at midnight on 26 March 2020, commercial credit grantors are very likely to experience a flood of requests for extended payment terms from debtors.
Trade credit transactions are typically based on 30 days from statement trading terms, however many debtors are likely to default on these terms at the end of April, May and possibly June 2020 as a result of the loss of income during the 21 day lockdown period. Customers are also likely to request longer terms in their droves, so best to prepare the strategy for when this happens.
The considerations for temporarily extending payment terms are:
- Additional facilities – by extending payment terms to your debtors you will place strain on your own cashflow and therefore need to ensure that you either have sufficient finance facilities in place, or that bankers or funders are prepared to extend temporary facilities to ensure business continuity. If your cash flow forecasting indicates that you just can’t afford to grant the extra 30 days payment extension, then rather do so very selectively.
- Loss of sales – after non-payment at the end of April, a number of your debtors will likely have to be placed on stop supply, meaning that your turnover will be negatively affected. By extending payment terms to debtors you are more likely to see some normality in turnover numbers for May and possibly beyond.
- No automatic limit increases – credit managers use terms and limits to regulate credit risk, and while it may be advisable to extend credit terms during this period, credit limits should only be extended on a case by case basis, and after careful scrutiny of each individual debtor. If credit terms are extended it is due to place pressure on your credit limits, but you need to keep this control in place to manage the maximum outstanding for each debtor.
- Extended terms mean extended risks – if you have debtors at present that already represent high risk to your business, think carefully about extending payment terms to them. With this group it is critical that decisions are made on a case by case basis, and preferably in consultation with the debtor. Remember that the longer your payment terms are the more risk you accept, so best think carefully before making risky customers even riskier.
- Extending credit costs money! Now is no time to slash prices to gain turnover, while extending credit terms to clients, or to offer settlement discounts on longer payment terms. It is a recipe for making losses. At Debtsource we calculate the cost of credit at approximately 1,5% per month, which is a combination of the interest rate, inflation rate and opportunity cost. By extending credit terms to debtors for an additional month, it means that you will lose an extra 1,5% of the sale value on average.
- Credit insurance considerations – if you do insure your debtors, please be sure to consult with your credit insurer on granting extended payment terms before doing so. Insurers have to agree to your terms, otherwise complications will arise if the debtor defaults and a claim has to be processed.
What is critical is to extend payment terms for a defined period only. An open-ended arrangement will have the effect that all or most of your debtors will continue to enjoy extended terms long after the Covid 19 issue has come and gone. Shortening a debtor’s terms is one of the hardest things to achieve in trade credit, so be very clear as to when the normal terms will resume on the account.
Finally, Debtsource is here for you during the shutdown period and beyond. Our staff will all be working from home and all communications and systems will operate as normal. We do however expect delays in finalising requests for detailed credit reviews, as many companies will not be available to provide the information which we required to finalise such reviews. Every effort will however be made to provide timeous feedback and support.