Expert: Ed McFarland - 7/31/2004

Question
Hi Ed,

Believe it or not, the person who sent this note is the same person I've been dealing with for 1-1/2 years.  When I saw the note I figured she got a bug up her rear or something or there could be newer people above her.

Since we are such a small company (machine shop) we only extend the normal net 30 day terms.  March of last year I implimented a credit card machine for Visa & Mastercard only and he has worked quite well.  There is only one company that we extend any discounted terms but it was kind of forced on us.  They are a very large corporation and they said that they only pay in net 60 days (which for us it took until 75 days before we saw the check) or it would be 2%-20, they do not accept any other terms.  So my boss just increases their normal bill by 2% so they think they're getting a discount and we are getting our full "original" invoice.

As far as my boss goes with the comment from this company, he said to issue a credit memo for the finance charges and then up their bill the next time they come in.  The problem with that is it still takes them forever to pay the bill so you're still stuck in limbo.  I wanted to call and find out what was up but he said just to do what he suggested doing.  This particular company is not a huge company, they are larger than us (there is a total of 5 of us, me - the office person, 3 machinists and then my boss who does machining and also reviews all the job tags before I invoice just incase someone in the shop took way too long to do a job then he'll adjust the time down) and they do ship their product (designer type soaps, some with little plastic things in them for kids, some with flower pedals in them, etc.) throughout the United States and Canada, they're not big like a 3M or anything, but they definately hold their own ground.

So really, they are under a legal obligation to pay these finance charges and they are just trying to see what buttons they can push and what they can get away with.  I had one company that racked up over $100 in finance charges, and it came down to them only doing checks once a month but by the time their accounting dept. got the invoices from being approved it was already 45 days past due.  So they changed the pay schedule for us to be immediate pay and we wiped out their finance charges, which worked for both of our companies.

Thank you so much for answering my question Ed!  I really do appreciate it!  My prior profession was 15 years as a purchasing agent so all of this stuff (accounting, HR, payroll, etc.) is all new to me and I am learning by trial and error.  

Thanks again!

Kind regards,
Patricia

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Followup To
Question -
Hi Ed,

I'm hoping maybe you can answer and or clarify something for me.  I've been working in a small machine shop as the office manager, accounting, purchasing, shipping, receiving, HR, etc. for just of 1-1/2 years.  We've applied finance charges to our customers who do not pay within our terms of net 30 days.  Some pay and some don't.  However, one company that had paid it in the past has now sent back one of my monthly statements which has the finance charges list for late payments of 60+ days from invoice date.  They wrote on this statement: "Sorry we do not pay finance charges unless you are a bank that we entered into a contrack with.  PS: we have no legal obligation to pay this, check with your attorney."  If all of our invoices and statements clearly state our terms of net 30 days and that we will apply finance charges on all late invoices at a rate of 1.5% or $5.00, whichever is greater, do they not have a legal obligation to pay especially since they've paid them before and or they are taking longer than our stated terms?  

I have never encountered this, and was floored when I read it, especially since this particular company has paid the finance charges before and we send all our customers who incur a finance charge an invoice clearly stating it is for finance charges, what the charges are for (i.e.: which invoices are late, the date of the invoice & amount) and what the total finance charge amount is.

Thank you for your response.

Kind regards,
Patricia
Answer -
My bet there is somebody new in charge and they want to change the rules. They are wrong, but have you called them and asked them where they are coming from on this?

Who's got the power here you or them? If you are dependent on them you may have to bite the bullet. I have seen big customers take terms such as 2/10 net 30, pay in 30 and take the discount.

You have choices if you think it is even or the advantage is yours.

Send them a note telling them you will no longer extend them trade credit and the purchases are COD.

Follow up by sending them a credit application, with the terms and have them sign it.

Look into adding mastercard, visa and getting out of the credit business. The cost of adding MC or Visa maybe less than you providing the credit. I did it and it improved cash flow and saved us the expense of chasing dead beats.

What has your management said when you told them?

Answer
It sounds like the boss doesn't want to deal with the problem. The money just doesn't add up for the risk of losing the customer.

But keep charging the finance charge or change the terms to on receipt, at least that starts the clock sooner.

Good luck.

Ed