Biting more than you can chew is a common phrase used to denote prudence, yet the phrase is rarely put to good use when it comes to interactions between suppliers and lenders.
In the recent times we have seen retail establishments thrive and expand, which is a natural course of business.
But behind some of these expansions are unhappy suppliers whose payments are not being paid on time, despite the fact that the retailer’s business is 99% cash. As retailers expand, they demand a more flexible credit limit in order to stock their new outlet(s), hence tying more of the supplier’s operational funds. Because every supplier is competing to have his/ her products on the retailer’s shelves, the supplier ends up extending credit in terms of goods and a more elastic repayment period as per terms dictated by the customer.
It is only prudent to establish if the person buying your goods on credit or borrowing your money has the financial capacity and willingness to repay back your money. If the business establishment or individual(s) has the ability, it would be wise to put a limit on how much can be advanced as credit and the length of time to settle the credit facility so advanced.
Always go through the why, how & when steps to establish a basis for extending the credit facility. Why-do you need the credit facility, How-will you meet your credit obligations, When- do you expect to pay back, are practical questions to ask a would be borrower /debtor, before extending credit.
Suppliers and lenders should never operate at the mercy of debtors and need to keep in mind that it is their money at stake in case of default.
As a supplier or a lender, it is important to understand your customer’s nature of business so as to establish the volume of credit and, the terms of credit to extend to them. If your customer runs a retail business, where most of their transactions are on cash basis, a shorter credit period would be ideal. Otherwise, extending longer credit repayment periods will choke the client (with excess cash) who, thinking that the money is his/ hers, is likely to divert such cash to other non-core activities, like real-estate or expansion.
It is important for suppliers and lenders to know that credit is a cost to the business and if not properly managed can lead to the loss of a budding client and collapse of their own valued business.
How do we mitigate against this loss.
• Have a credit policy in place detailing terms and conditions,
• Know your customers (KYC) well in terms of ability, capacity and the nature of business. Make use of business information reports which can be outsourced from independent contractors e.g. site verification and credit reports from credit reference bureaus,
• Employ qualified credit control staff,
• Carry out credit reassessment on your customers from time to time to establish the status of their business at any given time.
• Ensure that credit instruments, such as bank guarantees, are up to date.
In conclusion, it is only morally and ethically right for you as a lender or supplier, to protect your customers from the choppy commercial seas by first showing them how to swim in a pond of sensible financial planning.
In the event that a key customer gets into financial problems, your business is likely to be adversely affected as well.