Extending credit gives customers the option to buy products or services now and pay for them later. This is a good arrangement for customers, but can the same be said for business owners? There’s the risk of not getting paid at all, something that you should seriously think about. When you’re extending credit, you are offering an unsecured loan to your customers. As you wait for payments to come in you have no collateral to hold on to, leaving you to hope that customers will be good on their word.
Also, extending credit costs money and time. When customers pay with cash, you’ll have money on hand to reinvest in your business right away. When they buy on credit, you won’t have that ready cash, so until the time you get paid; you’ve actually incurred a loss.
But before you dismiss the idea, let’s look at five big reasons why your business is better off extending credit now in spite of the risks that come with it:
- Bigger sales: Customers will be less concerned about pricing and more focused on your products or services. When they don’t have to pay outright with cash the pressure of keeping within budget is not as urgent and the customer won’t be too anxious about checking price tags Thus, By extending credit customers often end up buying more than they intended to which translates into bigger sales for your business.
- Customer loyalty: Extending credit is definitely a pro-customer decision because it gives people the flexibility that paying in cash can’t give them. Thus, customers will appreciate the fact that you trust them enough to give them this option, especially when not all businesses are willing to do so. If they’re also happy with your products or services, they’re bound to become part of your loyal customer base.
- Competitive edge: Selling products and services will be easier online. According to Statista, there are 191.1 million digital shoppers in the U.S. as of August this year. Because credit card is one of the major payment options on the Internet, just imagine how many new customers your business can attract once you’ve introduced credit card as a form of payment. Otherwise, it will be difficult to conduct online transactions if your business accepts only cash.
- Decreased risk: Personal bankruptcies are lower than ever. According to Fitch Ratings, the percentage of personal bankruptcies in the U.S. hits its lowest level in seven years, down to 12 percent less than it was last year. Also, only 34 percent of Americans carry credit card debt from month to month as revealed in the 2014 Consumer Financial Literacy Survey conducted by the National Foundation for Credit Counseling (NFCC). That’s down by 3 percent from last year’s 37 percent. This means 68 percent of credit card holders try to pay in full every month to avoid carried over debt. It’s good news for your business because it means there will be a smaller chance of someone escaping payment by declaring bankruptcy or rolling over their debt for far too long.
- Reputation boost: Extending credit sends a positive message about your business. To outsiders, it’s a sign that your business is doing fine in the financial aspect. After all, you wouldn’t be able to afford to extend credit if your business doesn’t have a healthy cash flow and if you don’t have access to readily available working capital. Prospective partners and investors will be easier to convince to join you once they’re assured of the financial health of your business.
These are all compelling reasons to consider extending credit. But once you go this route, you need think of ways to protect your business. When you extend credit you assume that customers will pay on time and in full and, in most cases, that’s what happens. But expectations don’t always match reality, so it’s best to get credit insurance to fight against losses. In this way, you are free to give generous credit terms to customers without worrying about how your business will recover in case you don’t get paid.
Also, a little vigilance will go a long way. Before extending credit you can minimize risks by verifying credit data and history. This will give you an idea of your customers’ payment habits in the past which in turn will help you decide whether or not you can trust them enough to pay when they say they will.
Eventually, the longer you’ve been extending credit the easier it will be for you to identify scams. Being a good judge of character and integrity is something you develop over years of dealing with people. It’s an important skill for business owners to have and extending credit will help you gain it.
As a business owner it is ultimately your decision to make on whether or not extending credit is a viable option for your business. Consider all risks and benefits when making this decision, you stand to lose revenue through delinquent accounts but stand to gain exceptional growth in your client base and business credibility as well. Protect your business by having a solid credit selection process in place to avoid delinquencies and a collection system ready to handle delinquencies when they do happen.