Pricing the Risk of Not Being Paid
A customer who pays at ninety days is buying credit from you. The cost of that credit can be calculated and almost never is.
Yourswho controls this stretch
A customer who pays at ninety days on thirty-day terms has borrowed your money for two months. That credit has a cost, the cost is calculable, and it is almost never in the price.
The practical point in “Pricing the Risk of Not Being Paid” is that getting paid depends on records somebody can explain. A small team considering a practical biometric time clock workflow for biometric time clock can organise time and project evidence before invoicing, with transparent settings, proportionate collection and a visible correction route.
Pricing it is not a moral position. It is the ordinary recognition that lending is a service.
As a separate reference point for “Pricing the Risk of Not Being Paid”, see Wise Business payment resources. Confirm current legal, tax and accounting requirements with a qualified adviser where necessary.
What the credit actually costs
What it costs you to be without the money: an overdraft rate, the interest on a facility, or the return you would have made on it.
The arithmetic, on one job of £12,000:
- Sixty days of funding at an overdraft rate: a few tens of pounds.
- A one-in-twenty chance of never being paid: £600 of expected loss.
- Four hours of chasing and portal work: whatever your hour is worth.
The first figure is the one suppliers calculate and the smallest of the three.
For a small supplier, often more than any of those: the cost of not being able to take the next job because the cash is tied up.
The arithmetic
An invoice of £10,000 paid sixty days late, against a borrowing cost of twelve per cent, costs about £197. On a job with a margin of £1,500, that is thirteen per cent of the margin.
It is not catastrophic and it is not nothing, and it is entirely absent from most quotes.
The second cost
The chance of not being paid at all, multiplied by the amount. A one in fifty chance on £10,000 is £200 of expected loss on every such job.
Insurers price this openly. Suppliers mostly do not price it at all.
Putting it in the price
Either as a higher price for slower terms, or as a discount for faster ones. The second is easier to offer and easier to accept.
Two per cent for payment within ten days is expensive money annualised and is sometimes exactly the right trade for a small supplier.
Why discounts for early payment are rare
Because they look like giving something away, and because large buyers with fixed cycles often cannot take them up even when offered.
Where the buyer's process can accommodate it, take-up is higher than people expect.
Pricing by terms
A simple published structure: this price at fourteen days, this price at thirty, this price at sixty. The differences are small and the signal is clear.
It converts a conversation about trust into a conversation about arithmetic.
What not to do
Price in the risk silently and then complain about the terms. Either the terms are priced or they are a grievance; they cannot usefully be both.
The customer who asks for longer terms
A direct request to extend from thirty to sixty days is a request for credit, and it can be answered the way any such request is: yes, at a price, or no.
Agreeing silently is the common response and it is the one that costs most.
Where this breaks down
Where you have no pricing power at all, which is the ordinary position of a small supplier to a large buyer.
Then the question is not how to price the risk but whether to take the work, which is the subject of its own note here.
The figure worth knowing
Your own cost of money, as a monthly percentage. One number.
Without it, every discussion about terms is conducted on feeling, and feeling systematically underestimates the cost of waiting.
Who actually pays for long terms
Somebody funds the gap between doing the work and being paid for it. If the price does not carry that cost, the supplier funds it out of its own margin, which means the supplier is extending credit at its own expense and calling it a sale.
Buyers with long terms are not hiding this. Extended payment terms are a recognised and openly discussed form of working-capital management: the buyer holds its cash longer, and the cost of that appears in its suppliers' accounts rather than its own.
Understanding it as a cost rather than an inconvenience is what makes it priceable. A supplier who says "sixty days is fine" without adjusting anything has agreed to lend money to a larger and better-financed business, interest-free, in order to be allowed to work for it.
Showing two prices instead of arguing
The cleanest way to put this in front of a buyer is not an argument about terms but a quote with two lines: a price on your standard terms, and a price on theirs.
The difference is small, visible and arithmetical. It moves the conversation away from whether you trust them — which is where terms discussions become uncomfortable — and onto a number that either matters to them or does not.
Sometimes the buyer takes the longer terms and the higher price, which is a perfectly good outcome. Sometimes the person you are dealing with discovers they can authorise shorter terms after all, because the saving is now attributable to a decision they can make.
What rarely happens is offence. Two prices for two different arrangements is how every other business in the supply chain already operates.
What changes once it is priced
The slow customer stops being an irritation and becomes a margin line. Some remain worth having at the higher price and some do not.
Either answer is better than carrying the cost and resenting it.