They Extend Looser Credit Than You Do: Tighten or Keep?

If you think credit terms are a finance matter, you are about to hand a competitor a sales pitch. Credit terms are a quiet piece of the sales proposition. A customer who pays in sixty days and has always done so treats it as part of the price. Take it away and they hear a price increase. Keep it forever and you finance your customers' operations out of your own cash.

The finance team will want the cash, and they should. The sales team will want to keep the accounts, and they should too. The answer is neither a policy nor a negotiation. It is a decision by account, based on risk and value. For the general customer principles, read customer retention after acquisition.

See the full picture before you decide

Pull the receivables aging for the acquired company: average days to collect, the oldest balances, bad debt history, and the top debtors. Compare payment behavior with the stated terms. Many small businesses give generous terms and collect later still.

Then separate the customers into groups by payment habit. Those who pay on time, those who stretch, and those who are chronic. Each group has a different answer.

Why they gave terms in the first place

The former owner may have used credit to win or keep accounts. Some of those customers are large and sophisticated, and expect long terms from every supplier. Some are small, with a close relationship to the owner and thin balance sheets. Some are slow because the owner never chased them.

Ask the account team about the reasons for the top twenty. You will find a mix of strategic generosity and neglect. Treat them differently.

Options

Keep the terms, and price the cost of capital into the next renewal. Tighten in steps, for example from sixty to forty five days, with notice. Offer a discount for early payment, which turns the question into a choice. Require deposits or credit checks for new accounts, and leave existing ones for later. Or tighten sharply for the chronic late payers.

Do not apply one policy to everyone. A step change imposed on all customers at once looks like an attack on the customer base, and your reps will carry the complaints.

Protect the cash while you decide

During the transition, watch collections weekly. A new owner often loses collection discipline because the person who chased the balances has left or the system has changed. Make sure someone owns collections by name. A sudden rise in overdue balances is the first sign that something is wrong.

Keep an eye on the link to service. Customers who are asked to pay faster often ask for better service in return; see service levels more generous than yours. The same question arises on the other side with suppliers; see vendor payment terms that differ from yours.

Make it part of the plan

The decision on credit terms belongs in the integration plan as a working capital item, with an owner, a target, and a date. See the post-merger integration playbook for how to organize those decisions. I tighten credit by account and in steps, and I do not tighten it for anyone I have not called first.

Sequenced list: decide credit terms by account

Run before you announce anything to customers.

Questions to ask before you tighten any account

Is the customer slow because of cash trouble, or because nobody chased them? If it is cash trouble, tightening may hasten a failure and leave you with a bad debt. Talk to the customer, and consider a payment plan that shortens the cycle over time.

Does the customer have other suppliers who are also being asked to stretch? A customer who is stressed will pay the supplier who pushes hardest. Being gentle can mean being last in line. Decide your position with eyes open, set a clear limit, and stop shipping on accounts that exceed it, with notice and a call first.

Ask your finance lead to estimate the cash release from each approach, and the revenue at risk. A tighter policy that releases a modest amount of cash from a handful of slow accounts may not be worth the friction it creates across the customer base.

Be careful with small accounts

Small customers are the ones most likely to be hurt by tighter terms and the least able to push back. They are also often the ones with the closest ties to the people you want to keep. A sudden change can feel personal, and the technician who has served them for ten years will hear about it.

A good approach is to tighten gradually for the whole group while keeping a way for a customer in real difficulty to talk to someone. That keeps the policy strict and the relationship intact.

Keep the customers. Collect the cash, but do not lose the account to save the interest.

Questions