As of Q3 2025, non-financial corporations in Belgium have a total of nearly 260 billion EUR in outstanding credit according to the ECB. To place that in perspective, Belgium’s GDP is estimated at 642 billion EUR nominal (802 billion EUR PPP). All to say that providing credit to customers is a common practice in the Belgian economy and, while it contains risks, your business should not hold back from exploring whether it can provide credit, whether it would benefit your sales and discuss how credit could be managed.
Granting credit might not be optional. Depending on the industry, providing credit is standard in order to trade. When your business considers entering new markets, a lenient credit policy also helps gauge the market’s temperature for your goods and services.
In this article, we’ll discuss how to determine whether your business is ready, which considerations you should make and provide insight into the key focus areas to help you assess your business’ capabilities of granting credit.
Refresh your memory on concepts such as cash conversion cycle and its related metrics, specifically DSO and DPO, grab your own indicators and let’s start with a crash-course on credit and credit policy.
For clarity, we will refer to the party that offers credit as the “grantor” and the one who receives credit as the “grantee”.
Key Takeaways
- Granting credit is a strategic investment, not just a sales tool. Before extending credit, evaluate the impact on your cash flow and working capital and forecast incremental sales to determine whether the switch is financially justified.
- Your Terms of Sale define your exposure. The credit period, cash discount structure, and type of credit you offer directly determine how long your cash is tied up and what it costs to carry. Aligning these with your industry’s standards is a sound starting point.
- Pilot before you scale. Test your credit policy on a small group of trusted, recurring customers first. The results will reveal your true collection capabilities and allow for adjustments before committing at full scale.
Credit Policy 101
One concept should be clear from the get-go, by granting credit to grantees, your business is financing the grantee’s use of goods or services with the aim to increase your own sales volume.
In B2C, the grantee is considered the end-user and we refer to customer credit. In B2B, the grantee is likely to convert your goods or services for their own profit and we refer to trade credit.
Effectively, granting credit means increasing your days sales outstanding (DSO) and at the same time increasing days payables outstanding (DPO) of the grantee. Without expecting an increase in sales, this would be very beneficial for the grantee and not so much for the grantor.
A credit policy is usually summarised in terms such as, 2/10, net 30 or 3/10, EOM. Since it makes sense to allocate resources to the management of invoicing, and by extension credit, at certain intervals, it is no surprise that a 30-day period has become somewhat of an overall standard.
Granting credit should therefore not be treated lightly, and a solid credit policy will serve as a guideline in your business. In the next section, we discuss the basic components to consider when granting credit.
Terms of Sale
We differentiate three components within our Terms of Sale: credit period, cash discount and type of credit. The most common type of credit is an open account, though some industries still use promissory notes or IOUs.
Credit period
Our credit period is defined by a start-point and an end-point. Often these are the invoice date and the maturity date.
Credit for new customers can serve as the benchmark policy. Offering credit to them should offer a significant financial advantage for your business. Nonetheless, for trade credit, it is good practice not to exceed the grantee’s operating cycle. Otherwise we’d be financing part of their operations as well.
CFOrent Tip: clarity with segmentation
A good first step is to identify your goods and services, and determine their impact on your operational cash flow and CCC. This allows you to evaluate the available margins and the impact on each category/product/service.
Next, evaluate your recurring customer base and assign a risk profile. Customers with a favourable profile can be granted more.
Extra dimensions can then be created by differentiating among fast-selling and slow-selling products or high-volume and low-volume clients, making the credit policy a flexible tool to adapt to market influences.
The result is a matrix-style map with which you can decide what you can and cannot do in terms of credit.
If we assume that 100% of a business’s customers pay on the 30th day, and no other variables exert influence, our DSO will be 30 days. In practice, it’s more likely you will use the average collection period (ACP) as a means to measure the general collection period from sales.
While the credit period defines when payment is due, the cash discount determines whether early payment can be incentivised, and we’ll focus on the dual character of the “discount”.
Cash discount
In technical jargon, the term “cash discount” is used to define the first period in which a discount applies. Afterwards, the full invoice amount is due.
In a competitive market, the discount period allows cash buyers, or rather discount buyers, to get a percentage off the target price. Meaning your business will get less of the target price and provides an actual discount, but your business does not have to finance the credit period (only the discount period). Referring to our 2/10, net 30 example, we would only finance a maximum of ten days.
In a less competitive market, the discount price can equal the target price and the price on credit includes an interest premium.
Consider the following example which has a 2/10, net 30 discount policy.
We set our target price equal to our discount price. This means that if we use a 2/10, net 30 discount policy, the amount paid within 10 days matches our target price. In fact, we actually grant our customer 10 days of credit.
If the grantee does not pay within 10 days, they will pay a cost of credit.
Let us assume an invoice amount of 1.000 EUR. If the buyer pays within the discount period, they only need to pay 980 EUR (our target sales price). Else they pay 20 EUR more. So what is the interest rate on 980 EUR if the surplus is 20 EUR?
$$\text{Interest rate} = \frac {20}{980} = 2.04 \text{%}$$Remember, this interest rate is for a 20-day period. There are 18.25 such periods in a year:
$$\text{EAR} = {1.0204^{18.25} -1} = 44.6 \text{%}$$The effective annual rate (EAR) on a 20-day credit period amounts to 44.6%. From the grantee’s perspective, that is expensive financing!
In the latter case, the total amount of the invoice included an anticipated interest. The discount is not an actual discount in that scenario, and highlights the dual nature of how to approach credit policy.
Though it is worth mentioning that the customer’s perception exceeds marginal gains on profit from including an interest rate by default. Perhaps if your overall ACP is low, a policy as described might help cover the additional costs for collecting late payments and reminders, but generally speaking it is wise to follow industry standards at first, and then evaluate how your business can differentiate.
If you’d like to go more in-depth on analysing a credit policy and read up on carrying cost and opportunity cost, drop down the accordion below. A calculator is designed for you to experiment with.
Analysing Credit Policy with Calculator
The calculator below presumes situation A, where only cash sales are made, and situation B, where only credit sales are made on a 30-day period. The question it answers is whether it’d be profitable to change. Since the time factor is only present in cost of switching, it would also be valid to analyse any 30-day policy switch, e.g. from 30 days to 60 days.
Difference in Cash Flow when switching
Present Value for cash flow in perpetuity
Associated cost of switching to sales on credit.
Net Present Value (NPV)
Break-even point (NPV=0)
For illustrative purposes only, please contact us for tailor-made advice.
Carrying costs
In our calculator above, it is possible to calculate the break-even point of implementing a credit policy. It is a given that net profit needs to exceed the cost of implementing and carrying a credit policy. Carrying cost can be split into three categories:
- Required return on receivables.
- Losses of bad debts.
- Cost of managing and collecting credit.
The first of these has already been discussed above. Losses from bad debts are considered to be losses not worth pursuing. Depending on the amount of outstanding credit, it might no longer be worth pursuing collection, i.e. it might no longer be worth carrying the cost, and more beneficial to sell off the debt and cut losses.
The last category encompasses associated costs for extra personnel and technologies required to track and collect outstanding credit.
CFOrent Tip: no headache with a financial partner
Several major Belgian banks offer additional services to SMEs to assist them with debt collection. Credit, credit policy and debt collection are to be considered a discipline in itself, and are likely not the main focus of your business.
Do not waste too many resources on self-management when financial partners are available to tackle these for you. Enabling a financial partnership will allow your business to use its precious resources for what it should be used: prosperity and growth of the main activity of your business.
Opportunity costs
Conceptually, opportunity costs are the value of the next-best alternative when deciding on a course of action. Having a very strict credit policy is associated with high opportunity costs because you’re expecting few creditors, and the associated profit, to cover your expenses. A lax credit policy allows you to benefit from volume profit and better protection against bad credit, assuming you do not grant credit without certain threshold criteria.
However, granting more credit is associated with higher carrying costs. Managing ten or ten thousand lines of credit will demand a different approach to administrating credit.
Bringing together carrying costs and opportunity costs, there is a theoretical sweet spot for the amount of credit that should be granted and managed.
As noted at the opening of this section, finding the optimal credit amount is not an exact science. The exercise should focus more on defining a scope, with an upper and lower limit, in which maintaining a credit policy remains profitable.
Watch Cash Flow
Since the payment collection period directly influences the DSO, it also puts pressure on a business’ cash flow. In order to determine a reasonable credit period, the following steps will provide better insight:
- Benchmark DSO within the industry: by having a narrower view on common practice, you gain a starting point from which to begin.
- Map your own DPO and calculate your CCC: know how long your cash is tight in your own operations and understand why and where it is tied up.
- Create several cash flow impact analysis: these will help you understand the impact of hypothetical credit periods on your working capital.
Even if a business is running profitably, cash problems can still occur. This is an important thing to remember. So important actually, a poem was written about it!
Quoth the banker: “Watch Cash Flow”
Once upon a midnight dreary as I pondered weak and weary
Over many a quaint and curious volume of accounting lore,
Seeking gimmicks (without scruple) to squeeze through
Some new tax loophole,
Suddenly I heard a knock upon my door,
Only this, and nothing more.
Then I felt a queasy tingling and I heard the cash a-jingling
As a fearsome banker entered whom I’d often seen before.
His face was money-green and in his eyes there could be seen
Dollar-signs that seemed to glitter as he reckoned up the score.
“Cash flow,” the banker said, and nothing more.
I had always thought it fine to show a jet black bottom line.
But the banker sounded a resounding, “No.”
Your receivables are high, mounting upward toward the sky;
Write-offs loom. What matters is cash flow.”
He repeated, “Watch cash flow.”
Then I tried to tell the story of our lovely inventory
Which, though large, is full of most delightful stuff.
But the banker saw its growth, and with a might oath
He waved his arms and shouted, “Stop! Enough!
Pay the interest, and don’t give me any guff!”
Next I looked for non-cash items which could add ad infinitum
To replace the ever-outward flow of cash,
But to keep my statement black I’d held depreciation back,
And my banker said that I’d done something rash.
He quivered, and his teeth began to gnash.
When I asked him for a loan, he responded, with a groan,
That the interest rate would be just prime plus eight,
And to guarantee my purity he’d insist on some security—
All my assets plus the scalp upon my pate.
Only this, a standard rate.
Though my bottom line is black, I am flat upon my back,
My cash flows out and customers pay slow.
The growth of my receivables is almost unbelievable:
The result is certain—unremitting woe!
And I hear the banker utter an ominous low mutter,
“Watch cash flow.”
Pilot first
When your business has a clear view on what to expect, you can start with a pilot on a small group of your customers. Naturally, the best profiles to start with are recurring customers, with an on-time payment history and potential for more purchase.
Analyse the results of this pilot project, which in turn will provide new insights on your scaling capabilities and allow for corrections if necessary.
From this point on, your business can expand sales, provide competing offers to reel in new clients, create securities against bad credit and comfortably navigate the world of credit policy.
Conclusion
Providing credit as a business can boost sales. Before your business can implement a credit policy however, it must understand which components make up the Terms of Sale, and how they influence your business’ Days Sales Outstanding, Cash Conversion Cycle and Cash Flow.
Before adapting or making changes to a credit policy, your business must understand the impact it will have. Otherwise the credit policy may become a noose around the neck. Luckily, there are sufficient financial partners to assist you in creating, maintaining and upholding your business’ credit policy.
At CFOrent, our associates are experts with years of experience in helping businesses maintain their cash flow, understanding the necessary variables and providing solutions when needed. Feel free to get in touch for a tailor-made approach to implementing, assisting with and maintaining a profitable credit policy.
Sources
- European Central Bank. Quarterly Sector Accounts: Outstanding Credit — Non-financial Corporations, Belgium (Q3 2025). ECB Data Portal. ecb.europa.eu
- OECD. Belgium — Country Overview. Organisation for Economic Co-operation and Development. oecd.org
- Ross, S.A., Westerfield, R.W. & Jordan, B.D. Fundamentals of Corporate Finance, 10th ed. McGraw-Hill Education. (Figure 1: Optimal Credit Amount; credit policy analysis framework)
- Quoth the Banker: “Watch Cash Flow.” Reprinted from Publishers Weekly, January 13, 1975. R. R. Bowker, a Xerox company. Copyright © 1975 by the Xerox Corporation.
