Credit Matters Blog

B2B Credit - The Golden Goose is Dying

Kim Radok 17 April 2018

B2B credit is the equivalent of the golden goose for businesses when trying to sell their goods and services. Extended correctly, and to the right type of customer, B2B leads to greater profits than just selling for cash.

Unfortunately, the golden goose of B2B credit, has become so abused in the last 30 years, it has now affected its health and well-being.

When I first entered the work environment over 40 years ago, credit was considered a privilege and the granting of credit was respected. Then for some reason, I suspect generational change is the cause, credit became a right. As a consequence, people lost respect for being provided with credit and downgraded their responsibility for paying it back. If we look at the history of B2C (business to consumer) credit for example, consumers so abused this form of credit, most businesses have stopped extending B2C credit.

We are now entering a period where this same situation is starting to occur for B2B credit. A number of businesses are no longer offering B2B credit as they found Their customers had too many rights and no respect for the credit facility. In place of credit, businesses are now demanding cash up front payments, or part payments before supplying products or starting projects. It is also not unusual to see progressive part payments are also being enforced.

Why has the wheel turned with fewer businesses willing to offer carte blanch credit facilities to their customers?

The answer is simple really. Businesses have found they cannot achieve profitable sales by extending credit. Too often the business found the customer refused to pay the monies owed and court costs were unreasonably expensive to protect their rights. Even if the creditor received a favourable decision against the debtor, the debtor still refused to pay their debts because the penalties for non-payment are minimal.

Over the years, creditor rights have been emasculated through extremely high Court costs for the creditor and Government legisltion which is heavily focused on debtor rights at the expense of creditor rights. Meanwhile, debtors incur almost no costs in comparison if they have no desire to pay their debts.

These negatives are compounded by people with vested interests who sabotage the creditor from within the business by advocating going to court is just a waste of money or is throwing good money after bad. 

The end result of these factors results in a lack of determination to purse debts, has reinforced debtors in to believing they can get away with fraud and theft. The fact is this is what they are doing when they deliberately avoid paying their debts. 

In the end, businesses may make the decision that they are not banks and extending interest free credit is not within their core business responsibilities. The exception will be; unless extending credit leads to profitable sales.

In conclusion, at the moment the golden goose of business, B2B credit is being abused by too many debtors. If this situation continues, gradually I suspect, B2B credit will only be extended to the best customers which pay their accounts in a timely manner. As a consequence, many B2B customers may not be offered credit. Of course, businesses may become smarter when selling on credit. Based on history and current observed business practices, I am not sure many business people know how to do that effectively.

At the end of the day, your business is not a bank. Banks earn interest by providing finance to their customers. If your business extends B2B credit and cannot make a profit therefore, why is it extending credit?