Gabriel Peck – b2bcredit.io

At its core, leverage is the ability to influence customer payment behavior.

Creating and using leverage is critical in B2B credit management. Leverage helps businesses stay safe, get paid on time, and maintain strong customer relationships. Businesses should have clear plans for how they create and use leverage. Sometimes, businesses should change their plans to fit specific customers. The kind of leverage a business has can change how they handle accounts, deal with risks, and work with customers. Knowing why leverage is important, what happens if you don’t have it, and why it’s important to create customized strategies is key to becoming a great credit manager.

Why Leverage is Important

If a business sold goods and services on credit, and had no leverage, the business would just have to trust that customers will pay them. If the business had leverage, they would feel much more sure that they’ll get paid.

Leverage allows companies to:

Protect Cash Flow: It increases the likelihood that customers pay on time.
Reduce Risk: Strong leverage lowers the chance of missed payments and strengthens your position in disputes.
Strengthen Relationships: Leverage can help set clear expectations and build mutual trust.
Enforce Accountability: It ensures customers adhere to agreed-upon terms, preventing lax payment behavior.

What It Means to Have No Leverage

Operating without leverage is like walking on a tightrope without a safety net. You rely solely on the goodwill of customers to pay on time, which can leave your business vulnerable.

Signs of No Leverage:

Payment terms are too lenient, and there are no consequences for late payments.
Contracts lack enforceable clauses, such as penalties, guarantees, or collateral requirements.
Your company’s ability to track or monitor customer behavior (e.g., product resale, financial health) is limited.

When you have no leverage, your company is at the mercy of customers’ financial situations, operational priorities, or willingness to prioritize your invoices. This lack of control can lead to:

Cash Flow Issues: Late payments disrupt financial planning.
Increased Write-Offs: Defaulted accounts can pile up, eroding profits.
Weak Negotiating Position: Customers may take advantage of leniency, knowing there’s little recourse.

Example of Having No Leverage and its Consequences

Scenario: A company sells $500,000 worth of farm equipment to a mid-sized distributor. The payment terms are Net 120 with no collateral, no personal guarantees, and no penalties for late payment.

Outcome: The distributor’s sales slow down due to unexpected market conditions, and they prioritize paying suppliers who have stricter terms or penalties. The farm equipment company doesn’t get paid on time, faces cash flow issues, and struggles to recover the amount. After months of chasing payment, they end up writing off $100,000 when the distributor files for bankruptcy.

Lesson: Without leverage (e.g., a security agreement or penalties), the company has no control or recourse and ends up bearing all of the risk.

The Risks of Asking for Too Much Leverage

On the flip side, an overly aggressive approach to leverage can backfire. When businesses try to maintain too much control, it can alienate customers, damage relationships, and even harm reputations.

What Too Much Leverage Looks Like:

Demanding excessive collateral or guarantees that customers find unreasonable.
Imposing harsh penalties or termination clauses for minor delays.
Creating rigid payment terms that ignore customer-specific challenges.

The Consequences:

Strained Relationships: Customers may feel distrusted or undervalued, leading them to seek other suppliers.
Lost Sales: Excessive demands may deter potential customers from doing business with you.
Reputational Damage: A reputation for being inflexible or punitive can harm your standing in the industry.

Leverage is most effective when it’s proportional to the risk and aligned with the customer’s needs. For example, requiring a UCC filing for a small, low-risk order could come across as overbearing, while applying it to a high-value, long-term transaction is more reasonable.

Example of Having Too Much Leverage and its Consequences

Scenario: A supplier of construction materials insists that a long-term, reliable customer provide a personal guarantee and collateral for a $20,000 order, despite the customer having a 10-year history of on-time payments. They also impose a Net 15 payment term, even though most competitors offer Net 30.

Outcome: The customer, feeling distrusted and annoyed, decides to switch suppliers. The supplier not only loses future business but also gains a reputation in the industry for being difficult to work with.

Lesson: Overly aggressive leverage can alienate loyal customers and harm long-term relationships.

Striking the Right Balance

The art of leverage lies in balancing control with flexibility. The goal is to protect your company while fostering strong, collaborative relationships with customers.

Keys to Balanced Leverage:

Risk-Based Approach: Tailor your leverage strategies to the level of risk involved. High-risk customers may warrant stricter terms, while reliable ones may not.
Clear Communication: Be upfront about why leverage is necessary. For example, explaining the need for a security agreement ensures customers understand it’s a standard business practice, not a sign of mistrust.
Flexibility Where Possible: Offer solutions like early payment discounts or customized payment plans to ease the burden while still protecting your position.

Example of Balanced Leverage

Scenario: A distributor sells $250,000 worth of tractors to a customer with an average payment history. The payment terms are Net 90 with a “due when sold” clause. To protect the sale, the distributor files a UCC-1 financing statement to secure their interest in the tractors. They also offer a 2% early payment discount.

Outcome: The customer sells the tractors quickly and pays within 60 days to take advantage of the discount. The distributor avoids cash flow risks and maintains a positive relationship with the customer.

Lesson: By tailoring leverage to the situation—using a UCC filing and incentivizing early payment—the company balances risk with flexibility.

A Practical Framework for Leverage

Baseline Protections: Establish a foundation of leverage for all accounts, such as standard payment terms, late payment penalties, and credit limits. Baseline protections should consider the company’s broad credit strategy.
Scalable Adjustments: Adjust terms based on the customer’s risk profile, offering more flexibility to reliable payers and greater safeguards for higher-risk accounts.
Strategic Enforcement: Use leverage thoughtfully, applying stricter measures only when necessary to address delinquency or prevent loss.

For instance, if a customer frequently pays late, you might lower their credit limit or adjust terms to Net 30 instead of Net 60. For a first-time customer with no payment history, requiring a down payment or personal guarantee is a practical way to minimize risk.

Final Thoughts

Leverage is the foundation of effective credit management, but it requires a nuanced approach to be truly effective. Without it, your business is exposed to unnecessary risk. With too much, you risk alienating customers and losing opportunities. The key is to find a balance—tailoring your leverage to the specific dynamics of each account while protecting your company’s interests.

By mastering this balance, you’ll not only safeguard your company’s financial health but also build trust and credibility with your customers, ensuring long-term success.