Choosing the right balance in setting credit policies is a fine art. On the one hand, it is important for your business to work with retailers to build sales — but on the other hand, if you are too free with credit, you may lose more on your sales than you will make — and that soon leads to financial disaster. So then, how do you juggle the desire for higher sales with the need for rational credit decisions to strike the right balance?
To answer this question, one of the most important things to look at is the size of order. Obviously your credit standards should be more rigid on a large order than on a small order. In most instances, if you're selling to small retailers and your opening order requirements are not substantial, your typical first order will be in the $100-$300 range.
If you're using typical mark-ups to get to that wholesale amount, your out-of-pocket costs to produce the order will be in the $50-150 range. That being the case, your sale is no larger than what someone may typically spend on a retail-shopping trip. Sales of this nature are typically cash — including credit cards and checks. The dollar amount simply doesn't justify spending the time and money to do a full-blown credit investigation — so the terms are simple.
On your first sale to a retailer of this dollar amount, it is totally legitimate to request that it ship COD. In some sectors, such as the handmade craft sector, this is the norm. Their system is very simple and workable at both ends. The first order is COD and subsequent orders are shipped Net 30 days, which means the retailer pays by check 30 days after the order is shipped.
An invoice typically accompanies the package (as it should also with the COD shipment), and the retailer processes it for payment according to terms. The logic is that the supplier is guaranteed full payment on the first order — and the fact that the order was paid for indicates the store has the money to purchase additional inventory.
In the rare event that the retailer defaults on payment of the second shipment — assuming it's of comparable size to the first — the supplier only loses profit, since the first COD payment would cover the cost of the second shipment.
You stand a pretty good chance that the third order will be paid for because you now have two instances of good credit with the retailer. Theoretically, the most you can lose on this credit system is your profit. Your costs are covered.
If a retailer balks at the COD terms, explain that you are a small start-up company and you do not have the staff available to do credit checks. Asssure the retailer that you will notify them of the COD amount the day the order ships so they can prepare a check in advance and that subsequent orders will go open account.
Note: Do notify a customer of the COD amount whenever you make a shipment. Many times the people working in the store are not authorized to write checks and the shipment will have to be refused and reshipped the next day — which is a hassle for everyone involved.
Be wary of a retailer that gets too huffy at the COD terms on an initial small order. All too often that is a danger sign that the retailer is not credit worthy.
If you ship an order COD, make sure you ship it "complete". As reasonable as COD on a first order may be, it is unreasonable to expect a retailer to accept two or three COD shipments simply to get the entire order. There is an add-on shipping fee for CODs. If you ship in three increments, you are forcing the retailer to pay that COD charge three times!
If you must make an initial partial shipment, either cancel out the balance of the order or ship it out "open account" — after getting the retailer's approval. Many times the retailer would prefer not to get the straggling merchandise, preferring to add it onto their re-order instead.
Even when you start a relationship on a COD basis, it is a good idea to provide a credit application to the retailer for their submission. It gives you a good vehicle to ensure you have the proper information for your records of the name, address, and ownership of your customer. And it gives you a good way to store tax identification numbers just in case you're sales-tax audited and need to prove you were selling items for resale and not consumption.
Keep the form as simple as possible and ask for no more than one bank and three vendor references. Make it look professional — but not invasive. If you have time you may want to follow-up with credit information requests to the vendors and bank listed — but since your first order is COD, you don't need to hold up any shipments awaiting their response.
However you decide to handle credit, remember that the retailers are your customers. Treat them in a friendly albeit professional manner.