One of the critical decisions that business owners have to make is whether to offer customers credit. While selling on credit could be a great way to earn customer loyalty, it is also a tricky territory. Credit for customers could have a significant effect on your cash flows and eventually hurt your daily operations.
Unfortunately, it may be impossible to make all sales on a cash basis. This is especially if your competitors are offering credit to their customers, or when corporate clients demand credit terms.
The decision of whether to sell on credit could put you in an odd position. One of the considerations is that selling on credit terms is whether your customer has an acceptable credit score. Secondly, you have to decide if you have a good cash flow to support your business.
In this post, we feature some of the advantages and the disadvantages of selling on credit. Later, we will feature the dos and the don’ts when you must offer credit to consumers. Therefore, keep reading to see what impact giving credit to customers could have on your business.
Table of Contents
Advant The Competition
One of the advantages of selling to your customers on credit is that you attract more customers. To retain customers and remain competitive, you may have to offer goods or services on credit terms.
2. Increase In Sales
If your competition is not offering credit, you may experience an increase in sales. You attract the customers who prefer buying on credit, instead of paying cash to your competitors. On the other hand, if your competition offers credit to customers, you may experience very little or no increase in sales.
3. Customer Loyalty
Selling on credit may earn your business customer loyalty. When selling on credit, your customers appreciate that you already trust them to pay the bills before the due date. Therefore, such customers may reward the gesture by continuing to purchase from you. This is because they feel the degree of loyalty and like doing business with someone who already trusts them.
Disadvantages Of Offering Credit To Customers
Offering credit to customers comes with its negative aspects. Here are some of the disadvantages you may encounter.
1. The Possibility Of Bad Credit
The most significant risk when selling on credit is that you may never get paid back. Therefore, while some customers will pay you back, others may never honor the commitments they made while requesting for credit. In that regard, expect that you may have to write off bad credit.
2. You May Experience Cash Flow Problems
Missed repayments could be one reason businesses who offer credit too customers experience cash flow problems. Therefore, to avoid falling into cash flow issues, you are advised to have a good financial backup to support the business if customers fail to repay on time.
3. Comes With Extra Responsibilities
You may need to keep checking credit scores to determine whether to offer credit to customers. Besides, you have to be right in record-keeping, or customers will never remind you that you sold to them on credit. In case of missed payments, you need to talk to a debt collection agency. The extra responsibilities could mean that you employ an accountant to be in charge of credit sales.
We have reviewed the advantages and disadvantages of selling on credit. Now, we shift to the best practices if you choose to offer credit to customers.
1. Do Check Credit Score
A quick credit score check could save you from lending to customers who never honor their promise of repaying on time. Use the applications that offer accelerated insight platforms to check the customer’s background. You can obtain a credit score report online to help you make an important decision when selling to customers on credit.
2. Ensure You Have An Acceptable Credit Policy
An acceptable credit policy defines who you offer credit to. For instance, you may choose to provide credit to corporate buyers only.
3. Let Customers Apply For Credit
Require the customers to fill-out a credit form to qualify for the credit sale. This way, you will have a point of reference when you are forced to use the credit collection department.
4. Don’t Extend Too Much Credit
Be sure to analyze the business cash flow, as too much credit could significantly affect cash flow.
Don’t Offer Credit to customers
Instead, use retail consumer financing, which offers a more reliable platform for ensuring cash flow is not affected. Consumer financing for merchants is an excellent alternative to providing credit to customers.
Conclusion
You are still contemplating whether to offer credit to customers or sell on a cash basis? Credit sales could hurt your business negatively. Rather than offer credit to customers, engage the services of consumer financing. This way, you are assured of cash sales, which is right for your business growth and sustainability.
