By Rick Mooney, eHay Weekly Editor
With many of their customers struggling financially, commercial hay growers need to think about how they’re arranging financing deals and, in some cases, whether they want to extend credit at all, says Dawn Justice, president and CEO of the Idaho Bankers Association.
It has become increasingly common for hay growers to offer customers the option of paying in full 30 to 60 days after delivery, charging a few extra dollars per ton, Justice notes. While that extra-charge incentive might work for some growers, it can spell trouble for others.
“When you offer full terms on a 30-day or 60-day basis, you’re essentially playing the role of a lender, financing your customer’s purchase,” she says. “You’re rolling the dice and taking a substantial risk. To gain some additional profit, you are risking the entire amount of the sale. Before you do that, you need to carefully assess your business and financial situation. Ask yourself if you really can afford to take that risk.”
To reduce risk, consider terms that require buyers to make a substantial partial payment when the first load is delivered, followed up by regular payments over a specified period, Justice suggests. The amount you ask for up front and the length of the payment intervals will depend mostly on your tolerance for risk.
“All kinds of variations and scenarios are possible,” she says.
Regardless of how payment terms are set up, insist on a written contract that spells out delivery amounts, payment terms and payment dates. If the customer shows any reluctance to sign a contract, consider it a warning signal. “You probably don’t want to be doing business with someone who isn’t willing to make this kind of commitment in writing,” she says.
Wilson Gray, University of Idaho Extension livestock economist, also encourages growers to always use written contracts. Some growers shy away from doing so, fearing they might offend long-time customers. “It’s not a lack of trust,” says Gray. “It’s simply recognizing that circumstances can sometimes put people in a position where it’s more difficult for them to make payments in a timely fashion. If you don’t have a contract, you’re left without any recourse if things start to go south for that customer. You have to take steps to protect yourself.”
If a customer is offended by a request for a written contract, point out that you have to borrow operating capital just as he or she does and that your bank requires you to sign a contract. “It can depersonalize the request,” he says.
Be especially cautious extending credit to new customers and/or customers in other states. Justice advises asking for references, making inquiries of other suppliers and/or doing a courthouse check for outstanding liens or judgments.
“If you’re going to extend credit to any extent, you need to make it your business to learn as much as you can about them and their business. You need to do your due diligence on every single deal.”
Making it easy for customers to obtain credit may not always be in their best interest, Justice adds. “If buyers are on thin ice financially, extending credit is going to potentially give them the opportunity to get into even more trouble. If they don’t have access to the credit, it’s going to require them to be better business people. If you get easy credit, sometimes you make bad business decisions.”
Justice and Gray participated in a panel on this topic at the annual convention of the Idaho Hay and Forage Association in Burley last month. See a sample hay sale contract.
What steps do you take to avoid being burned when extending credit to customers? Click here to comment below this article on our Web site or email us at hfg@hayandforage.com.