Credit terms

The topic of credit terms is huge, and every day employees at Danish banks and other lenders work to change and optimize credit terms for their customers.

In this post, we have chosen to focus on credit in connection with invoice purchases - when a company chooses to provide credit to a customer and where the payment deadline is in the future.

Parameters in credit terms

Basically, the seller (creditor) determines its own credit terms and credit policies.

The creditor can demand anything from cash payment upon delivery of an item to providing many days or months of credit if desired.

Theoretically, credit terms should vary from customer to customer, as no two customers are the same and therefore do not have the same credit terms. In practice, we find that most companies have the same credit terms for their customers.

Basic parameters in credit terms for most businesses are credit duration and credit size.

Credit period

Credit period is the amount of time you want to give your customers credit for. The credit period can vary from cash payment (no credit period) to several months. The credit period is basically up to the seller to decide.

However, there may be certain competitive, sales and market conditions that mean some sellers may feel compelled to offer long credit periods. Many industries, such as construction, have historically had large and long credit lines, and thus a seller in that industry may be forced to offer the same credit periods if they don't want customers to reject them due to short credit periods.

Long credit periods are often an advantage for the buyer, who can buy an item on credit and have time to sell (and get paid for) the item before it has to be settled with the seller.

Long credit periods are often a disadvantage for the seller, as the seller has an inherent risk in granting credit. A risk that consists of not getting their money if the buyer goes bankrupt, dies or similar.

Credit size

The credit size is the amount of a credit. The higher the credit size, the more the buyer can purchase on credit.

A large credit size naturally carries a higher risk for the seller, as all credit has an inherent risk that the debtor cannot pay back all or part of the amount.

Conversely, a large credit size is an advantage for the buyer (debtor), as the buyer can purchase more goods without having to pay for them on delivery.

Why are credit terms important for a business?

All debt and credit pose a risk to the provider of the debt or credit. In the vast majority of everyday cases, credit, credit periods and credit sizes are unproblematic as long as the debtor pays their invoices or repays their debt.

But in cases where a debtor/borrower does not meet their obligations, does not pay their debts or does not pay their invoices, it is important to have strong credit terms that help avoid or minimize the potential loss that may occur.

The right credit terms and credit sizes are important to minimize the risk of bad debt losses.

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