A Guide to Restaurant Vendor Credit Terms

Most if not all restaurant startups are faced with the somewhat confusing task of wading through the vendor credit process so that they can operate with credit terms.

The steps required for establishing credit with your suppliers and their decisions can be somewhat perplexing. Particularly for the new operator, obtaining extended credit terms from your vendors can be a frustrating process.

The Catch-22 is that cash flow typically is tight for the startup. This is the time when you really need credit; however, it is also the time when creditors are least likely to extend it. If you have no clue how restaurant suppliers evaluate credit risk and are unfamiliar with credit terms and conditions, you can find yourself even more lost and confused.

This article is intended to provide the startup restaurateur with some understanding and insight into the challenges they and their suppliers may face in this process. The restaurateur can then be better prepared to approach their supply partner of choice, to negotiate from a position of knowledge and to work together to achieve the most favorable terms available.

A Popular Subject

Make no mistake; credit terms are a much-talked-about subject in your vendors' weekly sales meetings. Most broadline distributors estimated at the beginning of each fiscal year that they are going to write off somewhere in the neighborhood of $250,000 in bad debt. Restaurant credit terms are an ongoing issue that they struggle with.

As with all creditors, restaurant suppliers predicate their credit decisions on limiting their exposure to default. A brand-new restaurant most likely will not be well-positioned to get extended terms due to the suppliers' perception of whether that restaurant will still be in business in a year. That's basic finance

What you might not have considered is that a restaurant that initially purchases $1,000 to $2,000 per week in supplies may be in a better position to obtain more favorable credit terms than a restaurateur who initially plans on buying $10,000 per week. For the vendor, the logic is if the restaurant goes out of business after one month, he may face uncollected debt of $4,000 to $8,000 as opposed to $40,000. Thrown into the equation is pricing; that is, if a restaurant is willing to pay higher margins as a "street account," then the vendor might be willing to go a little farther out on the limb, since the account could reap higher profits.

The good news is that distributors want you to understand your credit terms and conditions, and can do a good job explaining their policies to you, especially if you already understand the lingo. Most foodservice distribution companies train their sales representatives to guide the restaurateur through the process and be their company's advocate. Ask and understand their standard terms, and work with their criteria.

Key Terminology

As you are probably aware, "Net" terms identify how long a customer can wait to pay the invoice. What you may not know are the various permutations available to restaurants, depending on their time in business. The most common terms listed on a vendor's credit applications are:

Standards for new restaurants:

• COD (Cash or check on delivery).
• Net 7 invoice.
• Net 14 invoice.

Standards for established restaurants, three to five years (as a rule of thumb):

• Net 21 invoice.
• Net 30 invoice.
• Net 10 proxy.
• Net 15 proxy.
• ACH (a form of electronic payment, i.e., direct debit).

All terms, except COD, Net 10 proxy and Net 15 proxy, require payment in the amount of time from the date of the invoice. A Net 7 invoice requires payment in seven days, for example. Payments on Net 10 proxy and Net 15 proxy credit terms (or "end of month 10 & 15" as they are also called) are due on the 10th or 15th of that following month. For example, pursuant to a Net 10 proxy, all invoices for January 2006 would be due to the vendor on February 10. On rare occasions, a vendor may set up a system with its account for invoices to be paid twice per month (whereas the restaurant pays on the 15th and 30th of the month). The terms will vary depending on the risk that vendor is willing to assume.

Customer 'Buckets'