Offering credit to your customers can be a risky, but rewarding, endeavor. Do you know if providing credit will help or hurt your business? You need to weigh the pros and cons before you offer credit to customers.
Is offering credit to customers right for your small business?
Deciding if extending credit to customers is right for your company can be challenging. To help you, here are some pros and cons to offering credit to customers.
Pros of offering credit
Providing credit to customers can offer some major benefits for your business. Let’s take a look at some of the reasons why you might want to offer credit.
You gain customers
With additional payment options, more people will be able to buy from your business. And, many customers prefer to pay with credit. You open your business up to a whole new market of customers by extending credit. Providing something that makes it easier to buy from you encourages customers to return to your business.
You get people talking
When you introduce something that benefits customers, people talk. Word-of-mouth advertising helps get people talking about what your small business has to offer. Extending credit gives customers another reason to talk positively about you. If you do decide to extend credit, don’t be shy. Let your current and prospective customers know about your new payment option.
You encourage large purchases
You’ll likely sell more expensive products if you offer credit. Selling large items much easier if you extend credit to customers. By letting customers pay you over several months, they are more likely to go for larger-ticket items.
You show stability
Offering credit to customers makes your company appear more legitimate and established. A new, unproven business usually doesn’t have the financial stability to offer credit. Doing so is a way of signaling to your customers and competitors that you’re moving up in the world.
You stand up against competition
Offering credit to customers gives you the competitive edge you need — not all businesses extend credit. Offer credit to give your customers another payment option.
Cons of offering credit
Just like any decision you make for your business, there will be pros and cons. Consider these downsides to extending credit to customers.
The possibility of missed payments
The biggest risk to offering credit comes from giving credit to customers who don’t pay you. While many customers will make payments on time, some will be late on payments. Or, they might need to make arrangements for late payment options.
You might have to pay collection agency
If a customer stops making payments, you may lose more than just the money borrowed. If you hire a collection agency to get the customer to pay their bill, you will have to pay a collection fee.
You might have to pay legal fees
You may end up hiring a lawyer to sue non-paying customers, which leads to legal fees. In the end, you may get almost nothing out of the money that was owed to you.
You need to be diligent with recordkeeping
You’ll have to step up your accounting game when offering credit to customers. You’ll need to create accounts for every customer who has credit with you. And, you need to track how much credit you offer, how much each customer uses, the interest they pay, and more.
You could have slow cash flow
When you sell on credit, you don’t have quick access to cash. Instead, you have more product going out than money coming in. A slow cash flow can affect your ability to pay bills, especially if some customers pay late.
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Should you offer credit to customers?
Overall, the final decision about offering credit to customers is yours.
Remember, you don’t have to offer credit to everyone. Many stores do a credit check and only extend credit to customers who have proven they can make payments on time. Also, you will need to comply with consumer credit laws (Federal Trade Commission) when extending credit.
If you’re considering extending credit, it’s best to create a credit policy and have a lawyer read it. You may be advised to set up an allowance for doubtful accounts (bad debt). You will also want to take a look at how offering credit to customers fits into your accounting.
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This article has been updated from its original publication date of September 9, 2016.
This is not intended as legal advice; for more information, please click here.