Offering Credit & Managing Risk – A Balancing Act
There comes a time in the life of all businesses where they have to look at the possibility of developing a credit policy, and ask themselves if they are going to offer credit to other businesses.
The importance of this decision should not be underestimated, and it is not a choice to be taken lightly.
In particular industries, clients and other businesses will not take you seriously unless you offer some form of credit arrangement, while in others it’s perhaps not as common. Every business has to look into what their competitors are offering, and ask themselves if it’s something they believe will bring benefit to their operation.
One thing that applies across the board, however, is that there is a certain element of risk to your business whichever way you decide to go.Download Lovetts’ free Letter Before Action template so you can send effective LBAs to your debtors!
At the top of the list of factors to be considered is the effect on sales revenue. By offering a credit line to your customers, you’re allowing them to delay payment for the service or goods you have provided them.
In theory, this is beneficial to those customers and should help you to win more business. It isn’t all that beneficial to your financial situation short-term though and can have a pretty substantial effect on your bottom line if not managed correctly.
Providing credit can also encourage your customers to place larger orders with you if they know they won’t have to pay the entire cost up front. This is undoubtedly one of the major benefits of providing your customers with credit, and can result in a pretty substantial upturn in sales and also encourages larger businesses to work with you, which brings obvious benefits.
Offering credit also allows you to get creative with offers that you make available to your customers, such as discounts for paying cash, and discounts for quick repayment of any credit owed. Depending on the type of service you provide you can alter these offers to suit, and they can help you to win business from the competition, who may not be quite so creative on willing to provide a flexible approach.
One thing to remember though is that by offering your customers credit, you will possibly have to take on some debt of your own to help finance the transition. Being able to sell your products or services without payment being made immediately isn’t something that every business can do, especially those companies who are relatively new. If you think that taking on some debt to allow you to offer credit to your customers is something that will benefit your business in the long term then fantastic, but make sure to run the numbers before making that choice.
Another point to keep in mind is that offering credit will almost certainly bring with it the chance that you’ll encounter bad debts.
Most customers don’t go into an agreement with you knowing that they won’t be able to repay the credit you give them, but the truth is that sometimes things can go wrong in business.
When this happens, you’ll have to decide if you’re going to simply write it off as one of the downfalls of operating in this manner, or if you’re going to have plans in place to recover the money owed.
In many instances, you can write off a portion of your bad debts and still come out with a positive bottom line, but the truth is that recovering money that is owed doesn’t have to be a drain on your resources both emotionally and as far as time goes. There are reputable debt recovery companies out there who can assist you in this matter, and who can help advise you when providing a customer with credit goes wrong.
Deciding to provide credit is an important choice for any business, but if you do your due diligence and weigh up the pros and cons, you should be able to determine if it’s a road you want to go down.