This is one of those situations in which several factors are involved. For example, if the customer has been long term, has contributed substantially to your sales, growth, and profits, you probably don’t have much of a choice but to extend payment terms to 60 days.
At the same time, you may want to clarify as to the reason(s) why. Is it a one-off cash flow situation that needs to be accommodated or some supply chain problem that will be resolved over the next few months? As long as you understand what the reason(s) behind the need for a payment term extension are, and that they appear to only be temporary, then you are probably fine to extend terms without decreasing the credit limit. And if it is only temporary, accommodating your customer may deepen the relationship resulting in future sales at greater amounts.
Conversely, if the need to extend payment terms by 60 days is much more serious, then perhaps decreasing the credit limit has to be the appropriate response. For example, if your customer is having some dire internal manufacturing issues that are significantly delaying its ability to ship and invoice its product, you may have to decrease the credit limit until things get worked out. Or maybe there is a confluence of factors impacting its cash flow and viability, whereby cash in advance may be the only option.
Extending payment terms by 60 days can have both advantages and risks for businesses. It’s important to carefully evaluate these risks and benefits before making a decision.
Your comments are most welcome.
Nancy Seiverd, President, CMI Credit Mediators, Inc. (nseiverd@cmiweb.com)
