Net 30? How Do You Decide?

t’s always been a predicament, and in a tight economy it becomes more important: Upon what do we base our decision to offer a buyer net 30 terms?

The industry practice is to ask for three trade references and a bank reference, but this doesn’t always work. Banks rarely give information freely, and there are multiple problems with the vendor references: These may be the only three vendors they pay.

Each reference presents a barrier to getting information: they don’t answer the phone, or the phone number doesn’t work, or they answer but only do references by fax or mail (and then they don’t respond) or they only have dealt with your prospective customer by c.o.d. or credit card, or they only have one person who has the information you need and that person is on vacation … the list goes on and on.

Even if the customer gives you great references, it can take an hour or more to check them all, and then make a decision. Multiply that by the 30 new accounts that want net 30 terms and you have just shot your whole week.

There are services that will give you a credit report, for a price. I tried using Dun and Bradstreet for a year, but found it wasn’t worth the considerable expense: It cost $33 per month, plus $20 per inquiry, and most often they didn’t have much because the store was too small, too new, or simply not in their database. (If they had some scanty information, though, they still charged us the $20.)

Other credit companies may work well in specific industries, such as the apparel, gallery or gift market, but my business sells to all of these and we couldn’t find one credit agency that covered them all.

Some of us extend terms when asked, and then we’re sorry. Emily Pearlman, a potter from New York City, last year lost $500 plus collection fees. Her net 30 accounts didn’t pay, some checks bounced and she couldn’t collect. Luckily, Jordan & Price, a collection agency in Florida, had a lot of information on accounts that owed her, and actually collected from two on whom she had given up. Now, Pearlman asks for three trade references. In the past, she limited her acceptance of credit cards because she didn’t want to pay the percentage they charge, but lately she has reconsidered.

So What Can We Do to Feel Safe?

Start as many new accounts as possible with credit cards. Because my business has a lot of customers who always use cards (smarter buyers get enough Frequent Flyer miles to pay their airfare to the shows!) the “discount rate” the credit card company charges me for their services is a low 2.4 percent. I feel it’s well worth it — I build it into my pricing.

Over time, I’ve found that there are only a few reasons why buyers won’t use a card. If they say it’s about the interest, that tells me they can’t manage money: there’s no interest if you pay the balance due every month. Do I want to trust them to pay me if they can’t manage a credit card? What if they don’t have one? The only legitimate reasons I’ve discovered not to use a credit card are either a very large or a non-profit business.

Abra Gorby, a jeweler, says there are a few kinds of shops she considers “guaranteed shops.” These include hospital, synagogue and museum shops. She also feels she can trust references from sales reps or people she knows. “I try to get credit cards, but if they insist on net 30, I want three references who are at the show. I ask for artists in the jewelry section, so they’re located close by and are people I know. Good buyers whip out a sheet with references and booth numbers at the show, which makes it easy. It’s a red flag if they’re insistent about net 30 and in a hurry.”

Two other common payment forms I have begun avoiding are:

• C.O.D. - The check can still bounce, and besides, what does it say about a buyer’s money management skills that they’ll pay an extra $6 to avoid using a credit card or being scrutinized for net 30 terms?

• Pro forma – This is an agreement by the customer to pay in advance to receive previously ordered items. We have often made the product, only to have it sit for weeks after we invoice them while we wait for a check or credit card number. We make endless phone calls, wasting our time, while we have already spent the money to buy the materials and pay for payroll.

So what do I do if a new customer won’t pay by credit card? I tell them I will write the order, but will only fill it if their references report that they’re saints. I won’t do a credit check for an order under $400. I explain that this isn’t about them, but about me — my little business is too small to gamble! I explain that there are two kinds of people who won’t meet these terms: ones who don’t have to (because they have excellent credit) and those who can’t pay me — and I can’t know which kind they are! With a little humor, we can usually find a way. And if not? I just say no. After 33 years in business, and nearly going bankrupt during one period, I have learned that it’s better (although painful) to refuse a sale rather than ship to someone who may not pay.

Patti Dowse is a Cambridge, Maine-based free-lance writer and the owner of Erda Leather.