Extending credit is something merchants do for their customers to make it financially easier for them to buy their goods and/or services. It creates a win-win situation for both parties. Because customers can pay for their purchase over time, they are able to buy more. Merchants are in the business of selling their products and/or services, so in the end they make more
By extending credit, sales go up. This is a very common practice in many industries, especially when it comes to providing legal services and in the trucking industry. In others, customers don’t really expect to be extended credit. Generally speaking, it’s very common in B2B businesses, as well as the type of businesses that sell their products and/or services to government agencies.
How Extending Credit Can Benefit Your Company
- Builds customer loyalty: By allowing your customers to purchase your goods and/or services now and pay you later over time, you are demonstrating trust. They appreciate having more control of their finances.
- Allows you to compete more effectively: Extending credit will encourage customers to return time and time again. If the competition isn’t offering this convenience, you’ll have an edge.
- Stimulates sales: When you let your customers pay for their purchases over time, they have an incentive to buy more. This will contribute to your growth and ultimately more profits.
There are substantial benefits that can be derived from extending credit, however there are some important things to think about when forming your credit policies.
Factors to Take Into Consideration
Most businesses have long-term loyal customers that are highly trustworthy, and then you have some that you would never trust in a million years. The good news is that you can decide whom you want to extend credit to. Before you make any decisions, have a look at the applicant’s business credit report. That will give you a good idea as to whether they are credit worthy or not.
One Size Does Not Fit All
When checking your customers credit reports you will see who has good credit, who pays their bills on time and who does not. Someone with good credit is someone you could reasonably assume will not have a problem paying you on time as agreed. On the other hand, if someone has a poor credit history and had trouble meeting their financial obligations, that’s a warning. If you extend credit to someone who ignores your invoices, you will probably end up hiring an expensive attorney to take legal action on your behalf, or you might decide to just take the loss.
Although, “NET 30 days” is the standard, you have the option of extending that to 60-90 days for your best long-term customers, ones you trust. New customers should only be given 30-day terms to start with. They have to prove themselves trustworthy.
If you offer the wrong terms it can cause terrible problems with your cash flow and problems with those customers as well. However, if you have a new business or you do contract work as a freelancer, it’s hard to determine what terms to offer. You want to get paid as soon as you can while forming good relationships.
It’s best to play it safe by going by the standard of NET 30 days, which most small businesses follow. This policy clearly states that an invoice must be paid in full within 30 days of being received.