When a company or business offers its customers credit, it’s basically trying to encourage clients to spend more money. However, offering credit to your customers must have careful consideration prior to moving forward. In fact, offering credit can be one of the biggest risks any business can take. You need to know how it will impact your business and whether your company is financially stable enough to offer it. Here’s what you should know before offering credit.
Evaluating the Benefits
According to Yonyx, offering credit can be beneficial to both you and the customer. One such advantage includes gaining the upper hand in your chosen niche. No matter what type of company you have, the world of business is a competitive one, so it’s important to be one step ahead of your competitors.
Here is a list of other benefits that comes with offering customers credit:
- You could see a dramatic increase in sales
- Customers are more likely to return
- Customers will think highly your brand and will give positive reviews
- Offering credit positions you as a legitimate business
Just with these four benefits alone, offering credit to your customers can make your business flourish. As a result, your competitors will have a difficult time trying to reach your level.
Understanding the Risks
Despite all of the potential benefits, there are risk factors to consider. Some of the risks will depend on the type of business, the available financial backing, and the security and the terms of the credit offered. However, even for a multi-million-dollar corporation, offering credit can still be risky. Offering credit may lead to diminished cash flow. The money you receive from your purchases may go to business expenses as well as your employees. According to nCino, a true CECL compliant calculation should at least cover the remaining length of the contract. Another risk involves dealing with customers with less-than-ideal credit. Even if you jump through hoops to make sure a person’s credit is good, there’s always going to be someone who refuses to pay. This warrants having to report them to a collection’s agency, which is not free.
Setting Limits
When it comes to offering credit, says Windfall, you also need to set limits. Make sure the credit limit you set parallels your customers’ creditworthiness. Make sure that anyone who is extended credit has a positive credit history. In addition, decide on the repayment terms prior to extending any form of credit. Depending on the amount and the terms, customers need to adhere to repayment terms. If they do not, they may be subject to penalties.
Offering credit to your customers is a great way to boost profit. However, it’s also important to consult with a financial expert prior to offering any type of credit products. If in doubt, hold off until your business is financially sound.
Here’s another article you might enjoy: Which Factors Affect Interest Rates on a Loan?
