Credit: A sale is not complete until you collect the money

Posted by Tom LarsenMay 14, 2014 Operations, Planning 0 Comment

One of the biggest differences before a business moving from B2C to wholesale is payment terms and credit. We can all envision selling lemonade to consumers and taking cash. In wholesale, stores are issued terms for their payments to give them time to sell the products to even out their cash flows. How you issue credit to these companies can make or break your business. People new to business, or who come from the “online” world, are typically not well versed in the massive risk they may have in issuing credit to retailers or distributors, just because they exist.

The terms offered to a retailer are exactly like the terms American Express or Visa offer to a consumer. There is a credit amount and a mutually acceptable payment agreement. In consumer products that agreement opens the door to the shipment of goods to the retailer. No agreement on terms, by either party, and there is no shipment of goods to the retailer.

The dance that is the credit and terms conversation is critical to the foundation of the relationship between the two parties. Terms of net 90 (payment will be made 90 days after shipment) means the inventory put out today will not become actual cash you can spend on something for 3 months. If you don’t have 3 months of rent, payroll, etc., already in place, you can’t take the arrangement.

Once agreed to, both parties must do all in their power to meet the expectations of the other so as not to create a difference of opinion at the time payment should be due. Any hiccup in the process can derail an entire project. Particularly in the area of chargebacks.

Most people don’t realize that large scale retailers now typically all have chargeback systems whereby they reserve the right to take an automatic discount (chargeback) for any misstep the vendor may have in the transaction process. These chargebacks are now part of a menu of screw-ups that vendors over the years have inadvertently created. Ship late costs $50 per carton. Fail to send an invoice on time costs $2500 per invoice. These are only examples. The list goes on and on.

Chargebacks will also delay a payment. Imagine a $20,000 invoice that is important to your business, being charged back (discounted) by the customer $3,500 (after the fact) for whatever reason and then not being paid on time because it is now going through additional processing at “Big Store”. It can be crippling to a new or young business. Cash flows can be everything.

Having experienced our own challenges over the years, and watching retailers continue ratchet up the number of ways they can take discounts, we are very tight with credit. We review businesses, call other vendors, set realistic payable credit limits and watch the payment practices over time. We read through vendor manuals for every possible glitch that might arise. Through experience with the downsides of credit and chargebacks, we protect the income as much as is possible so the final amount paid equals the initial amount invoiced and it gets paid on time. No one wants to have a million dollars in sales for which they only got paid $600k. Yet, it happens, all the time.

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