What are credit terms?

Credit terms are the payment agreements made between a buyer and a merchant during a commercial transaction. These terms dictate when the payment is due, any discounts available for early payment, and potential penalties for late payments. Effectively managing credit terms is crucial for businesses, as it directly impacts cash flow, customer relationships, and overall financial health.

Types of Credit & Payment Terms 

Merchants have a number of options when it comes to offering credit terms to buyers. Let’s briefly cover  the most common methods:

Trade Credit Terms

Trade credit is extended by suppliers to businesses, allowing them to purchase goods or services and pay for them later. Key terms include:

Instalment Payments 

Instalment payments offer business buyers the ability to spread out the cost of products or services over a specified period, enabling buyers to ease cash flow constraints by paying in regular increments.

Revolving Credit Terms 

Revolving credit allows borrowers to use credit up to a certain limit, repay it, and then use it again. The most common examples are credit cards and lines of credit.

PayLater

PayLater (or B2B Buy Now, Pay Later) is a modern financing option that allows consumers to make purchases and defer payment for a defined period (such as 30 or 60 days), while the merchant receives the funds upfront from a provider.

Setting Credit Terms

Evaluating Customer Creditworthiness

The foundation of effective credit terms lies in thoroughly assessing the creditworthiness of customers. This evaluation should consider factors such as the customer's payment history, financial stability, industry reputation, and the volume and frequency of their transactions. By understanding the risk profile of each customer, businesses can make informed decisions about the appropriate credit limits and payment terms to offer.

Determining Appropriate Credit Limits

Establishing suitable credit limits is a delicate balance for a merchant, managing their exposure to risk and meeting their buyers’ needs. Factors such as the buyers’ past purchasing patterns, the value of the goods or services provided, and the buyers’ own financial standing should all be taken into account when setting credit limits. Regular reviews and adjustments to these limits can help businesses adapt to changing market conditions and customer behaviours.

Establishing Payment Terms

The choice of payment terms can have a significant impact on a business's cash flow and customer relationships. Common options include net terms (e.g., Net 30, Net 60), early payment discounts, and late payment penalties. Businesses must carefully consider the industry norms, their own financial requirements, and the needs of their customers when crafting these terms.

With Kriya PayLater credit terms are handled automatically in a single payment flow.

PayLater enables businesses to get paid upfront, while offering buyers flexible payment terms across eComerce and offline sales channels. We handle credit and fraud risk for you through a seamless buyer onboarding process at point of order. Once credit-checked, eligible buyers are given a spending limit in a matter of seconds. Limited companies are authenticated through Director ID checks and we can run KYC for sole traders via the same flow. 

By mitigating your risk and removing the friction from onboarding, buyers can be approved faster, resulting in more sales from credit-worthy customers.

Setting the right Credit Terms

Customising Credit Terms for Different Customers

One-size-fits-all credit terms may not always be the most effective approach, as different customers may have varying needs and financial capabilities. Businesses should consider personalising credit terms to individual customers, taking into account factors such as their transaction history, strategic importance, and overall risk profile. Offering the appropriate credit options can be a major differentiator against competitors and a powerful conversion tactic.

Kriya’s PayLater solution enables merchants to offer a range of flexible payment terms while handling all credit checks, authentication and setting the appropriate spending limits for each buyer.

Negotiating Terms

In some cases, customers may request modifications to the standard credit terms. Businesses should be prepared to engage in constructive negotiations, balancing their own financial requirements with the need to maintain strong customer relationships and remain competitive in the market.

Risk Management

Credit Insurance

With most traditional forms of credit, like trade credit, Investing in credit insurance can provide a valuable safety net for businesses. This protects the merchant against the risk of customer non-payment or insolvency. By transferring a portion of the credit risk to an insurance provider, businesses can safeguard their cash flow and mitigate the potential impact of bad debts. 

Note: Merchants that offer PayLater don’t need to rely on trade credit insurance to de-risk the credit they offer customers, as the risk of non-payment is absorbed by the PayLater provider. Leave the credit risk to the experts - speak to our team today.

Factoring and Invoice Discounting

Factoring and invoice discounting are alternative financing options that allow businesses to convert their outstanding invoices into immediate cash. These solutions can be useful for companies seeking to improve their short-term liquidity and manage credit risk more effectively, but are still retrospective solutions to problems rather than an effective strategy to fix the problem at source.

Setting Up a Credit Policy

A well-designed credit policy serves as a roadmap for managing credit terms and mitigating risks. This policy should outline the company's credit approval process, credit limits, payment terms, collection procedures, and the roles and responsibilities of various stakeholders involved in credit management.

Are You Innovating or Leaving Money on The Table?

Give buyers the choice to pay on their own terms and provide a seamless checkout experience with Kriya Paylater. We handle the transaction from end-to-end, with a frictionless buyer journey. 

• Instant buyer authentication & spending limits set
• Flexible payment terms
• Kriya pays you in full on delivery of order
• Kriya takes on the risk & handles payment collection

PayLater is driving real growth for our merchants:

• 40% Buyer Adoption
• 45% Revenue Growth
• 4x Increase in acquisition of new buyers

Talk to our team today to find out more about how we can help you