Extending Trade Credit to Transport Customers

Without customers and revenue, you won’t have much chance of growing and scaling the business. But not every customer has enough cash available to pay for what they need up front.

This is where trade credit becomes an important part of running your business. The reality is that a good portion of your customers will require trade credit. Perhaps they don’t want to eat into too much of their cash flow. Or perhaps they’re looking to get access to more working capital. Trade credit could also help them increase their sales and get a leg-up over the competition. Whatever the reason, trade credit is something you’ll have to deal with when running your business.

But when deciding whether to extend trade credit to your customers, you obviously need to take several factors into consideration. It can’t just benefit the customer; you need to get something out of it too. And the last thing you want to do is offer trade credit to a new customer and then find your invoices aren’t being paid on time (or at all). That’s certainly not going to help your company’s growth plans and cash flow. 

So, your sales team has brought a potential deal to the table and they’ve asked for trade credit. This means they want to pay for your services or goods without paying cash up front. Essentially, they want a credit agreement that lets them pay for your services or goods at a later agreed date. This depends on what payment terms you set (i.e. Net 30, Net 60, Net 90). 

But here’s where we see a lot of companies jump the gun and rush to sign a new customer because the idea of the sales it will generate for the business is so promising. Sales is good – I agree. But signing a customer is a lot like dating. You need to make sure it works for both sides. And before you sign a contract with a new customer, wouldn’t you like to know if they have enough money to pay their invoices on time? You don’t want to be left holding the bill, right?

Ryan Greenberg, Enterprise Account Executive for Creditsafe, knows all too well how important it is to do your financial due diligence before extending trade credit. “When you’re doing your due diligence on a company, you want to see historic data on how a company pays its bills. You also want the ability to see trade payment data and live time events that might be derogatory – like whether they have any tax liens or judgements against them. And you also want to think about how long the company has been trading, how big the company is and how much revenue they generate annually. These are all factors you should consider when assessing risk before extending trade credit.”

What information does your team need to know before you can all get to a ‘yes’ and sign the customer? First things first, you need to run a credit check on the business. Business is business – you can’t take a director’s word for anything. You always want to protect your company first.

Now, this is where a lot of businesses think they should be reviewing the same information in a business credit report as they would in a consumer credit report. That’s a common mistake. Sure, credit limit information can be nice to know. But it rarely tells you the most important information so you can assess just how strong or weak a customer’s financial health is and if they have a good or bad track record of paying bills on time.

Here are some key data points you’ll want to look at when reviewing a customer’s business credit report.

• Days Beyond Terms (DBT): Your team should be looking at DBT regularly. This is such a telling metric, as it tells you how many days past payment terms that your customer typically pays its bills. There are a few things you need to look at when it comes to DBT. Don’t just look at their current DBT. Look at their DBT over a 12-month period to see if their cash flow is consistently stable and to see if their DBT has jumped drastically in recent months. To give you context, if a customer has a DBT between one and 10, that’s not considered to be a high risk. But it’s not just about a specific number. If you see their DBT had previously been between 3 and 4 for a while and then it spiked to 10 in a month, that could be a sign that something has changed internally and is putting a strain on their cash flow.

• Current vs. late payments history: Remember how I said that payment behaviors are a lot like dating? Well, it’s true. When reviewing a customer’s business credit report, look at their historical trade information to see how many (percentage) of their bills have been paid on time or late (1-30 days, 31-60 days, 61-90 days, 91+ days). Let’s say you look at this data and you see that they have only paid about 45% to 55% of their bills on time for the last 6-9 months and the total number of their late payments has consistently increased month after month. This should be a red flag for your team when you’re deciding whether to extend trade credit to a customer. Depending on other financial information you have – both in their credit report and their financial earnings) – you’ll then need to decide if they’re worth the risk or could end up costing your company dearly in the long run.

• Dollar amounts of late payments: This metric will give you an idea of the dollar value of late payments. The reality is that not all late payments are cause for concern. If a company has few late payments that only come to a few thousand dollars, compared to the millions or billions of dollars they generate in revenue each year, then you likely wouldn’t have cause for concern. But if you’ve reviewed the credit report of a customer and found that over 40% of their bills are past due and the dollar value of those late payments is both high and has consistently increased over time, that should ring alarm bells for your team. You either may decide not to extend trade credit or you might negotiate better payment terms. This is something your team and the sales team need to come together and discuss. Not every sale is worth it.

• Annual sales and revenue: If you’re dealing with a publicly traded company, then it will be easy for you to review the financial earnings reports for a customer. But if you’re not, you may want to ask for the past few years of financial reports so you can determine if they have enough money to pay your bills. You’ll want to pay attention to how their sales have either increased or decreased in recent years and if their operating expenses have increased.

• Debt: If a customer is asking you for trade credit, chances are they have done so with other vendors too. And they have likely taken out other forms of financing and loans to keep the business running, support growth plans and bolster cash flow. You’ll want to do your research and get a clear picture of how much debt they hold and how much (if any) cash reserves they have. 

According to a study by PYMNTS and Routable, 71% of the surveyed transport firms said they process an average of at least 1,000 payables each month, while 72% of those businesses expected their payables to rise by 11% or more over the next three years. Just think about these stats for a minute. If your transport customers are processing an average of 1,000 payables each month but they don’t have enough incoming cash to pay those invoices, chances are they’ll fall behind on paying multiple vendors, which could include your own business. 

When it comes to managing your Accounts Receivables, you need to think about it from your customer’s perspective and make sure you understand what Accounts Payables problems they might face.

• Are they missing invoices?
• Are they struggling to pay bills on time and can’t seem to right the ship?
• Are they relying on manual invoice processing, which is leading to data entry errors, matching errors and delays in issuing payments?

These are all questions you should be asking. But don’t just ask yourself this – make sure you understand what types of AP problems your customers might face. This will help you to focus on the right financial data so you can properly assess if it makes sense to extend trade credit to a customer or not. 

According to the Atradius Payment Practices Barometer study, 40% of US businesses said they offered trade credit to win new customers during the pandemic. What was especially interesting from this study is that 51% of the businesses reported an increase in the use of trade credit in the months following the COVID-19 outbreak.

Of course, the pandemic unleashed a host of challenges that made it tough to run a business. Even though things have improved severely since the height of the pandemic, the economy is still struggling with rising inflation, interest rates and a cost-of-living crisis.  

There are several reasons a customer would want to apply for trade credit.

• It eases cash flow: Given the current economic uncertainty, it could be that your customer anticipates a drop in customer demand and sales. So, they may want to protect their cash flow and make sure they have a cash reserve in case things don’t go as planned. So, asking for trade credit will help them do this.

• It gives your customers access to working capital: Your customers may anticipate having to spend a lot of money to buy equipment, inventory and maintenance. If there isn’t enough cash on the balance sheet, this could be hard to do. So, trade credit could be appealing in this instance.

• It allows your customers to expand into new markets: It could be that your customer is looking at the long-term picture and mapping out how they will grow the business over the next two to five years. Part of those plans could be that they want to expand into new markets. Trade credit will allow them to do so without depleting their cash flow. 

• Build trust and loyalty with customers: If you’ve been hoping to work with a multinational brand for a long time and finally get them to the point of closing the deal. Let’s say you’ve done your due diligence and reviewed their business credit report to make sure they’re a low risk and will be a reliable payer. If it all checks out, offering this customer trade credit is a smart choice. It shows them you’re mature and want to build a long-term relationship with them, rather than just close the deal.

• Show you’re financially strong: Extending trade credit is a great way to show potential customers that your finances are in good order and you have sufficient cash flow. Remember, your customer is vetting you just as much as you’re vetting them.

• Increase your competitive advantage: Not all businesses can afford to extend trade credit to customers. So, by doing this for your customers, you can win new business that competitors wouldn’t be able to. This also becomes a nice selling point when you’re negotiating with new customers.

• Generate more sales: If you’ve done your due diligence and decide that potential customers are low risk, then offering them trade credit is a good way to seal the deal. This will help you generate more sales and revenue for the business in the long run. But remember, don’t extend trade credit to every customer that asks for it. Review their credit report, look at key financial data and then make your decision. 

• Your customers might pay late: Obviously, trade credit will be great for customers who pay on time. But as our State of Credit Risk: 2022 report found, this isn’t always the case. Businesses typically pay their invoices about 16 days past payment terms.

• Your cash flow may not be as stable: When customers pay for your services or goods up front, then you can rely on that cash coming in. But when you offer trade credit, you could have some customers that pay on time, while others pay late (or haven’t paid in months). This could cause serious issues with your cash flow, which means you could end up falling behind on your own payments. And if that happens, your own company’s risk and creditworthiness will be damaged.

• You need to focus on AR management: If you sell on trade credit, then you’ll need to make sure you and your team have enough time, the skills and resources to manage Accounts Receivables properly. If you’re a team of one person and are juggling multiple financial responsibilities, then it could be harder for you to manage AR and make sure you’re staying on top of billing and collecting payments from customers.

• You may not recoup all payments: If you have a customer who has failed to pay one or more invoices over an extended period, chances are you may end up hiring a collection agency to recover the losses. Often, you’ll see a collection agency offer a special offer to pay only a portion of the payment owed. So, you may not get the full payment and you’ll also have to pay the collection agency’s fees and even lawyer fees if things get bad. 

I was speaking to a senior-level executive who manages Accounts Receivables and Risk for a global transportation company. And he said something that really resonated with me. He said that his team was always trying to get a point of ‘yes’ when reviewing sales deals. That’s good for the business, good for the sales team and good for the risk team.

But he explained that it can sometimes be a difficult balancing act for him and his team. Their roles are centered around reducing risk at every corner. But they also want to generate and increase sales. The more sales they generate as a business means the company itself is deemed to be a low risk to vendors, suppliers, partners and investors.

This is something we found in our study last year, The Sales vs. Credit Control Battle. As our study found, 47% of sales professionals said they have up to 10 sales deals rejected every month by the finance team. This is something risk management and AR teams want to improve just as much as sales teams do. At the end of the day, both teams want to get to a ‘yes’ without sacrificing the company’s growth potential and without exposing it to unnecessary risks.

That’s why it’s so important not to skimp on due diligence. If you assume that a potential customer is automatically a low risk simply because they’re a well-known brand name and have thousands of employees worldwide, that’s skimping on due diligence. Every business has the potential to fall into bad times and struggle with cash flow. We’ve seen it time and time again, especially in the transportation industry. Just look at what happened to Yellow Corporation last year. The trucking giant filed for bankruptcy in August 2023, blaming its feud with the International Brotherhood of Teamsters Union for its demise. 

Not every business may see the value of automating the trade credit application process. For example, a small business with about five employees simply won’t have the volume of credit applications that a large, multinational company would have.

If you look at multinational transportation companies like FedEx Corporation, Avis Budget Group and XPO Logistics Freight, these companies are likely getting hundreds of trade credit applications a week from new customers. If the finance/Accounts Receivables team has to process these all manually, that’s going to be a huge time-suck. Plus, it’s likely to open the company up to more risk if each customer is evaluated manually. This is supported by the findings of a study by PYMNTS and Routable, which found 61% of transportation companies with automated AP processes reported being highly satisfied with those solutions. 

As our Enterprise Account Executive Ryan Greenberg explains, automation will be of tremendous value for AR teams that manage a large volume of credit applications.

“One of the most common problems transport companies face is managing a high volume of trade credit applications for new customers. So, they want to process these as fast as possible, while also making the most informed and reliable decisions. It’s not realistic or efficient to expect your AR team to manually sort through hundreds of trade credit applications every week. This is where automation can help. You can customize the data you request from customers in your trade credit application, build workflows based on key parameters of your credit policy and then get an automated decision quickly (that you can rely on).”

Here are some things you should make sure can be done when automating your trade credit application process:

• Choose from a large number of questions to ask potential customers: This will let you get as much information as possible and get a clear picture of your customer’s financial health and creditworthiness. If you only have a few questions available to include, then you could end up missing out on key information and make the wrong decision.

• Make sure trade references can be uploaded: You can’t just rely on what a potential customer tells you and fills out in their trade credit application. Make sure your automated trade credit application process requires potential customers to upload trade references so you can do the proper due diligence.

• Build workflows on the back end based on your credit policy: Make sure whatever automation tool you use makes it easy for you to build and customize decision workflows based on important elements of your credit policy. For instance, if you don’t want to extend trade credit to any company that pays invoices more than 5 days past payment terms, you should be able to set this on the back end. Then, that factor (along with others) will be taken into consideration when your credit decisions are made.