There has been an ongoing debate among business owners as to whether or not extending credit to their customers is an ideal practice to consider. The reality is that you’re providing your products or services upfront, with the hopes that the customer will repay you at a later date. Of course, there are various risks involved that should be considered, but with the proper management of your cash flow and credit departments, extending credit to deserving and qualified customers can prove to be less of a risk and more of a competitive edge.
Reality Check: Times Are Rough
Though the global economy is recuperating at a pretty steady pace, it doesn’t negate the fact that many people are still facing financial difficulties. In fact, according to CNN Money, in 2013 roughly 75% of all Americans are living paycheck to paycheck. The average consumer does not have excess money to spend on big ticket items (no matter how necessary they may be).
As such, many businesses have reported seeing a significant decline in sales. Providing consumers with another means of payment allows them to afford products or services that they may not have otherwise been able to purchase. This in turn keeps them satisfied with what they need and keeps you in business.
Pros to Extending Credit
Below are five benefits your business could take advantage of by providing other methods of payment to your customers:
Extending credit to your customers is like saying that you appreciate them and their business. When you provide them with a way to better manage their cash flow, they are more likely to return to you in the future. Extending credit essentially says you trust them and trust is huge in business.
2. Product Reputation
One reason that businesses steer clear of extending credit is that they fear the customer will receive the product, become dissatisfied, and refuse to pay. However, by extending credit to your customers, you’re essentially stating that you stand by your product and know that they will be satisfied.
3. Competitive Edge
Of course, not every small business is willing to extend credit to their customers. So by implementing an in house financing option within your organization, you’re already putting yourself ahead of the competition. A customer who is looking for a particular product or service will be more willing to do business with you simply because they don’t have such high upfront costs.
4. Increased Sales
Offering extended credit options to your customers gives them more buying power. Think about it; if a customer has more time to pay on the products or services, they can afford more products/services over a given period of time as opposed to having to pay for all of them upfront.
In House Financing Tip: Now that you know the benefits of extending credit, you should begin looking for the ideal way to offer in house financing. Some companies, like Extend Credit, provide cloud-based SaaS platforms for this purpose.
Overcoming the Risks
A wise business owner will assess the good and the bad of extending credit. The biggest negative of course is the chance that a customer will not pay timely or even at all. To decrease the risks involved, one must come up with strict credit practices such as:
- Run credit checks before hand to assess the chance of risk for each customer
- Establish clear and consistent payment guidelines
- Establish a strong billing procedure
- Create an effective plan of action for collecting on delinquent accounts
Compliance Tip: It is also important to ensure that your business is in compliance with consumer credit laws prior to offering in house financing options. Check with the Federal Trade Commission to ensure that you’re in compliance with all laws.
Starting a business in and of itself was a great risk, but that didn’t stop you from rising to the occasion. Extending credit to eligible consumers can greatly impact your business for the better. While you must prepare your business for the potential risks involved, extending creditcreates customer loyalty, puts you ahead of the competition, builds product reputation, and increases sales over time.
Photo credit: Chris-Havard Berge / Flickr