Recently, while working on a Workshop, I encountered a problem with how delegates reacted to a given situation. We were working with an imaginary scenario where a Greek distributor, having been the subject of an undisclosed internal fraud was seeking their vendors’ assistance; their vendors’ Credit Management was being role-played by our training delegates.

The Distributor, role played by the trainer had not admitted to the fraud and was asking for their payment terms to be extended to offset their growing overdue receivables. The brief given to the delegates was to work as a team of three, meet with the Distributor and:

  • Establish the real cause of the problem.
  • Come up with a solution agreeable to both parties.
  • Thereafter create a report to their Board of Directors summarising the solution.

The group worked diligently before, during and after the meeting they identified the root cause and produced a credible report. However, there was one major defect contained therein. As a part of the overall solution they had agreed to the Distributors request to extend their payment
terms from 60 to 90 days.

During my long career as a Credit Professional, I can say without fear of contradiction that I never once extended payment terms on a customer’s request. That does not mean I did not successfully negotiate numerous distressed customer situations to mutually agreed solutions and there are sound principles that support that position.

  •  When dealing with distressed customers you will have to accept that you will rarely be paid the amount you want and when you want it. Acceptance of this fact and of the errant payment behaviour it brings does not require a change of payment terms.
  • Credit Lines, when set properly should approximately be in-line with the rate of goods or services supplied during the period of the payment terms. Therefore, a knee-jerk reaction to change payment terms would likely necessitate a corresponding change in the Credit Line. This would lead to an increase in exposure at a time when a progressive reduction in exposure is the desired direction.
  • These changes would also have negative effects operationally and legally. From an operational standpoint, you would be restricted to only applying a credit hold after the Credit Line or Payment Terms had been breached putting further pressure on outstanding
    exposure. The legal complication is that any legal action and the application of remedies such as penalty interest can only be done after the contract has been breached.

In this case that would occur when the 90 days payment terms had been breached as this is viewed as an integral part of the contract. It would not apply to the credit line which is granted and amended at the discretion of the supplier and is not contractually binding.

Lastly there is a geographic and cultural dimension to this particular example. The countries in Southern Europe are typified as expecting and having longer payment terms and payment performance to match. So, if you have a customer on 60 days, the likelihood is you will be paid on 90 days.

Correspondingly if you extend it to 90 days, guess what? You will be paid in 120 days. This view may be regarded as cynical but it is borne out by extensive hands-on experience.

In conclusion, I would say that I don’t want to claim a monopoly on wisdom in these matters and I’m sure that fellow professionals will have extended payment terms and achieved acceptable results by doing so. It is however a dangerous place to operate and gamble with your enterprises’ money. I hope that anyone grappling with this dilemma will find these writings helpful.

Bill Dunlop