Most raw material suppliers will hold credit insurance and be bound by the requirements of those policies. The rules will govern who can get credit, what limit will be provided and how slow payment is handled. Holders of these policies adhere strictly to the terms to ensure that their cover for all customers is solid. There is still a lot of scope for you to influence the availability of credit to your business by approaching your credit strategy from all the relevant angles.

Credit Limits

1. Ensure that your accountants file your year-end accounts with the Companies Office as soon as possible. Some accounting firms favour waiting until close to the filing deadline, however, if you have strong results, the sooner these are officially available, the sooner their reality is included in your credit rating.
2. Provide up-to-date management accounts, if requested by a supplier. Often these requests are viewed with suspicion and the relevance of their requirement not properly understood. Often your supplier may well be seeking an increased limit to facilitate growth in your business. If confidentiality is a concern, ask if you can liaise directly with a contact at the credit insurers.
3. If you hold credit insurance yourself, it is worth offering your supplier the opportunity to liaise with your own insurers directly. On the face of it, your holding of this insurance does not have a direct impact on your ability to pay for goods ordered. However, knowing that your debtor book is insured reduces the real risk for your supplier and your holding of this policy can add to your creditability.
4. Suppliers do trade beyond the terms of their insurance at times. If you have strong commercial relationships with your supplier, it is well worth negotiating this with them. Perhaps there is information you can supply them to give them comfort, for example, perhaps your increased business is being driven by a blue chip customer and this is information you are willing to share with them.
5. If you are experiencing a positive growth period and require increased credit from a supplier, it can make sense to offer to supply your supplier’s credit insurers.

Payment Terms

6. Be commercially aware. What kind of terms are the industry norm? Make sure that the length of the credit term is in line with what is available in the market. Check what other suppliers would offer. This varies with industry and country. Thirty and sixty days ‘end of month’ are seen regularly in Ireland and the UK but continental Europe often trade on ‘date of invoice’ terms.
7. The time to negotiate your payment terms is before you place the first order. It is very difficult to increase the length of this term at a later date without a large new piece of business.
8. Sometimes, initial orders are on a pro-forma basis but there should be a clear agreement even before that what the intended terms will be once the opening payment history has been established.
9. At the outset efforts are concentrated on establishing the longest possible terms with the highest possible limit. However, it is a good idea to clarify what early payment terms are possible. This can come into play when business grows rapidly, credit limits are reached and payments on account are needed before invoices are falling due to allow for further shipments. It may be possible to arrange to pay some invoices early and receive a discount. Waiting for the limit to be reached first is likely to miss out on this opportunity.

Payment Procedures

10. Pay your other suppliers to terms too. Credit insurers and credit rating agencies communicate. The news of your non-payment of one supplier will travel.
11. If there is a genuine issue with a supplier’s invoice, be proactive in getting the issue resolved to your satisfaction as quickly as possible. Policies often have strict reporting rules and unless clearly flagged as a query, unpaid invoices are required to be reported within a certain number of days after falling due.
12. In manufacturing, strong long-term relationships can often form part of your competitive advantage, particularly in more challenging trading times. It takes time to build up credit and credibility so these should be factored into decision-making processes. To facilitate this, it is important that your accounts and commercial departments are working together to create a strong relationship at all levels within your supplier’s company.

Purchase Ordering

13. Order strategically. It makes far more sense to purchase for shipment/delivery of your goods at the start of a credit period to avail of the longest credit terms possible.
14. In a similar vein to timing your orders, it is also worth carefully considering the order quantity ordered. While your sale may be secured around the purchase of material at a certain lot size, it often happens that it takes time for quantities to ramp up to the quotation level. So in the meantime, while it may have an adverse impact on margin, it may make more sense ultimately to place orders at a higher price point but lower order quantity. It reduces the credit requirement and in the event the product scale up does not happen as anticipated, your stock levels have not been unnecessarily increased. It is usually far easier to order more of a new material, than return unwanted quantities or find an alternative use.