Selling on credit: payment terms with shops and cafés

Selling on credit to a shop means you are financing their stock: you deliver today and they pay in 7, 14 or 30 days. It can be a good channel, but only if you agree the terms in writing before the first delivery: how many days, how they pay, a credit limit and what happens if they are late. Start with short terms, raise the limit only once the customer has shown they pay, and make sure your margin can carry the wait.

If you are still deciding whether this channel suits you, the guide to selling wholesale to shops and cafés covers pricing and presentation. This one covers the money side.

What changes when you sell on credit

At a market stall you sell and get paid in the same minute. With a café on 14-day terms, you pay for ingredients today, bake, deliver, and the money arrives two weeks later. In the meantime, you are the one funding it.

That is why selling on credit affects your cash more than your profit. The sale is just as profitable, but your cash flow changes: a gap opens between what you spend and what you collect, and it grows with every new customer.

The terms you need to agree

Before the first delivery, put in writing:

• Payment terms: how many days after delivery they pay. Start with payment on delivery or 7 days.
• How they pay: bank transfer, card or cash. Make it something that lands in the business account.
• Credit limit: the most they can owe you at once. If they reach it, the next delivery is paid on arrival.
• Invoice: what your invoice shows and whether prices include sales tax. Check your local tax rules or ask an accountant.
• Unsold or expired product: whether you take it back. If you do, it is no longer credit, it is consignment, and the maths changes.
• What happens if they are late: the next delivery is on hold until they pay.

An email the customer replies to with "agreed" is already better than nothing.

Worked example: what giving terms costs you

You sell boxes of 12 brownies to four cafés. Wholesale price: $24 a box. Variable cost per box (ingredients, box and label): $11. That leaves a $13 contribution per box.

Each café buys 8 boxes a week. All four together: 32 boxes × $24 = $768 a week.

Money that is always out with customers:

Moving from 14 to 30 days means keeping $1,536 more tied up in the business permanently, without selling one more box. That money comes out of your cash or out of a loan. If you are just starting, add it to your startup costs: it is money you need before you collect your first payment.

The risk if a café closes: say one closes owing you four weeks.

• Unpaid boxes: 8 × 4 = 32.
• What they owed you: 32 × $24 = $768.
• What you already spent on ingredients and boxes: 32 × $11 = $352.
• What you expected to make: 32 × $13 = $416.

Earning back the $352 that already left your pocket, at $13 a box, means selling $352 ÷ $13 = 27.1, so 28 more boxes. That is three and a half weeks of that café's orders, working for nothing.

How to set a credit limit

A simple rule: the limit is what the customer buys in two weeks, and lower if you do not know them yet.

In the example, two weeks from one café is 16 boxes, or $384. If a café with that limit closes, the most you lose is 16 × $11 = $176 of cost, which you earn back with 14 boxes ($176 ÷ $13 = 13.5): under two weeks instead of three and a half.

To raise the limit or lengthen the terms, ask for three cycles in a row paid on time. To lower it, one unannounced late payment is enough.

Reminders that do not burn the relationship

Most late payments are not bad faith; they are disorganisation. A fixed reminder routine collects more than awkwardness ever will.

• One day before it is due: "Hi Sam, a quick note that the invoice for the 8 boxes delivered on Monday the 6th, $192, is due tomorrow. Bank details are on the invoice. Thanks."
• On the due date, if unpaid: a short message with the amount and how to pay.
• Three days late: a phone call. Ask when they can pay and write the date down.
• Seven days late: the next delivery is on hold until they catch up, as agreed.

Keep a list of every customer, every delivery, the amount and the due date. Check it on the same day each week.

If a payment is late

• Stop delivering. Every new delivery to a late payer increases what you can lose.
• Offer part payments with dates. "$100 this Friday and $92 next Friday" gets paid more often than "pay me when you can".
• Switch to payment on delivery. You can keep selling to them without extending more credit.
• If it cannot be collected, write it off. Then look at what limit you gave and why.

A large late payment can leave you without money for the week's shopping. So that it does not stop production, keep a cash buffer that covers at least what your biggest customer can owe you at once.

Do it with the calculator

Before you agree to terms, put the product into the food cost calculator at your wholesale price. Seeing what each box leaves you tells you how many boxes you would need to sell to recover a bad debt, and how much credit you can afford to give.