Not all entrepreneurs know that when offering invoices with deferred payment deadlines to their customers, they actually grant trade credit to them. Unawareness of this issue may prove problematic when our business partner turns out to be unreliable. Frozen assets, caused by unpaid invoices, deprive an entrepreneur of the funds for its current activity and may threaten financial liquidity of its company.
In trade terminology we use phrases: ‘sale with deferred payment deadline’ or ‘sale payable in 30 or 60 days’, though it actually means a trade credit. An entrepreneurs thus assumes the risk of potential non-payment, as the bank that grants a credit. Does an entrepreneur analyse financial standing of the customer or an assessment of debt recoverability as the bank does? Unfortunately, in the majority of cases it does not, since not many companies may afford employing an analyst who would perform such analysis or buying a software assessing, e.g. customer’s creditworthiness.
Terms of cooperation shall be determined in detail as early as at the order stage. One should also check which terms guarantee proper service performance and the corresponding payment. It is extremely important to watch the deadlines of execution and settlements and collect documents confirming service performance or product delivery. Entrepreneurs tend to forget that an invoice does not constitute evidence for service performance or order placement for the court, that is why the other documents are so important.
If we have doubts about our customer’s financial standing, it is worth additionally protect our company and use, for example, insurance services. A cooperation agreement should be well formulated and we should be free to assign receivables which will prove helpful when we choose to use factoring services. Thanks to factoring, we do not only get funds for our activity from the issued invoices, but the factor may assume the risk of insolvency or take care of possible debt collection.
Published on: 14 November 2016