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When to give credit period in invoice?

Updated on :  

08 min read.

The scenarios when a credit period can be given in an invoice heavily depend on certain factors that influence business decisions. A credit period or trade credit in the invoice is the time given to the customer to make the payment for the goods or services purchased.

  • Industry-standard

Most industrial sectors have commonly accepted practices of allowing for a deferred payment of goods or services provided. The actual number of days permitted for a particular credit period may differ from industry to industry, depending upon the average working capital cycle prevalent in that industry.

  • Competition

By offering your business partners and customers the facility of a credit period, you are attracting them toward conducting business with you frequently. Since competition is high, there is always a chance that you may lose customers. Facilities such as a credit period lay the foundation for a long-standing relationship and encourage them to stay loyal to you.

  •  Products, volume and frequency

For regular customers who order in bulk, it has become a standard practice to give them a bit of relaxation when it comes to payments. Offering them a discount for early payment and giving them a credit period facility solidifies the bond between the customers and the business.

  • To build business relationships

Customer and business partner relationships are built on the foundation of trust. Offering them a credit period depicts that. It tells them that you have faith in their ability to make the payment by the specified due date.

  • For more lucrative sales

Offering a credit period for new customers, especially, is a very good proposition. New buyers will be sceptical about the quality of the products or services on offer, which is why the first order may not be huge. However, extending them the facility of a credit period may well result in bulk orders in the future since it gives them flexibility for payments.

  • Registered buyers’ credit scores and ratings or creditworthiness

While computing the credit scores and assessing the creditworthiness, the buyer’s ability to make the payments within the credit period offered by businesses is also a key factor. The fact that payments made within the due date will contribute to the final credit score of that individual.

  • As a part of vendor financing for startups

Vendor financing is one of the methods of financing startups. This is when manufacturers or distributors defer the payment until the goods are sold. Therefore, the credit period is sometimes extended from 15 days to 30, or even 45 days in certain cases. This option gives the startups some breathing space and ensures that they aren’t completely cash strapped.