Credit periods by sector, and why they matter to a financier

An aged debt report shows how long each invoice has been outstanding. It doesn’t show whether that is normal. A ledger where most of the money sits in the “two months” column could be healthy or in trouble, depending on what the client sells, to whom, and on what terms.

For a credit controller collecting on a funded ledger, and for the client manager deciding how much to lend against it, knowing the normal credit period for the trade is the starting point. Without it, “overdue” is just a column heading.

Terms, and what the law says when there aren’t any

Most business-to-business sales are on agreed payment terms: 30 days from invoice, 30 days from the end of the month, 60 days, and so on. Where a contract between businesses sets no terms, the Late Payment of Commercial Debts (Interest) Act 1998 treats payment as due 30 days after the invoice or the delivery, whichever is later. Terms longer than 60 days are allowed between businesses only if they are not grossly unfair to the supplier, and public authorities are expected to pay within 30 days.

So the first question for any debtor is simple: what terms did your client actually agree? The answer is in the order, the contract or the client’s terms of business, and it is often not what the client manager assumed.

How the main trades differ

Every client is different, but some patterns are worth knowing:

• Haulage and logistics. Invoices are often raised per load or per week, with terms such as 30 days from the end of the month. Some large customers self-bill, issuing the payment statement themselves, which makes the customer’s statement the document to check, not the client’s invoice.
• Recruitment and staffing. Usually weekly invoices against timesheets approved by the end client. Payment problems often start with a timesheet the end client hasn’t signed, so an “overdue” invoice may never have been approved in the first place.
• Construction. Payment runs through applications for payment, valuations and payment notices, often with retentions held back until completion. A contractor’s ledger can look slow even when every party is paying on time, and amounts can be reduced by the payer’s own valuation.
• Food and grocery supply. Large retailers often pay on long terms and take deductions for promotions, short deliveries and damaged goods. The risk here is less late payment than dilution: invoices paid in full on time are rarer than they look.
• Manufacturing and engineering. Terms vary widely, from 30 to 90 days, and disputes about specification or delivery are common. A debtor paying everything except one invoice usually means a query, not a cash problem.
• Public sector. Generally slow to set up and reliable once it pays, but purchase order numbers, supplier registration and invoice format have to be exactly right, or the invoice is never processed.

Why this matters to the financier

A funded ledger is lent against on the assumption that debts will be paid in a predictable way. Two things follow from the trade’s normal terms:

1. The funding cut-off. Most facilities stop funding invoices beyond a set age. If a client’s normal terms are 60 days end of month, a tight cut-off may leave good debts unfunded for no reason, while a generous one in a 30-day trade may fund debts that are already in trouble.
2. What counts as a warning sign. In a trade that pays in 30 days, a debtor sliding to 60 is a concern. In one where 75 days is normal, it may be nothing. Credit controllers who know the trade spot the real changes sooner.

Reading the ledger in context

When you look at a client’s aged debt report, start with three questions:

• What terms does the client give, and do all debtors get the same?
• Which debtors are paying slower than they used to, compared with their own history rather than the column headings?
• Is the shape of the ledger changing month to month, or just the total?

A debtor that has always paid at 55 days and now pays at 85 is telling you something. A debtor that has always paid at 85 is telling you about its own process.

Agreeing terms that work

Credit control starts before the invoice. A client that agrees clear terms, puts them on every invoice and confirms them with new customers makes every later conversation easier. Where a big debtor insists on long terms, the client and its financier should know before the first invoice is raised, not discover it on the first aged debt report.

Knowing the normal credit period for the trade won’t collect a single invoice on its own. But it tells you which invoices to worry about, and that is where good credit control begins.