Credit Policy
Many small businesses are reluctant to offer extended credit out of fear of being taken advantage of, i.e. not getting paid. Although extending credit to customers can be risky, it can also help you win more clients, strengthen your professional credibility and boost your bottom line.

Your goal is to make it easy for your target audience to buy your products, and offering extended credit is one way to do that. If your competition offers more appealing terms, then they have an advantage over you. You must meet or exceed your competitors’ credit policy to entice customers and increase sales.

Offering extended credit can encourage your customers to:

  • Spend more, resulting in a sales surge if receivables are turned to cash;
  • Stick with you long-term, due to increased trust and goodwill;
  • Be less focused on price and more focused on your services.

At the same time, be cautious when creating a customer credit policy. You want to attract customers with extended credit, but you don’t want to attract customers who aren’t credit-worthy.

So, how do you protect yourself? One good way is to write firm rules and requirements for your company’s credit policy. There’s no one-size-fits-all policy, but your policy should be based on:

  • Your particular business and cash-flow circumstances
  • Industry standards
  • Current economic conditions
  • The size and experience of your staff
  • The dollar amount of your transactions and your profit margins
  • Your tolerance for risk

The Risks

Certain risks are involved in granting extended credit. The major risk is that the customer might not pay. If you adopt a more liberal extended credit policy for your business, you will need to be prepared to handle future collection calls, or hire someone to take care of them for you.

When you offer credit, you are basically giving your product on loan to the customer until they pay you, while your operating costs continue to grow and working capital decreases. If you decide you can realistically carry account receivables of $30,000, then you are going to need a game plan for replacing that $30,000 in your cash flow. There is also the additional expense of credit checking, credit-bureau memberships, and costs of collection agencies and lawyers.

A Final Word on Extended Credit

Extended credit can be an asset to your business, helping to attract new customers and retain current ones. But a too-lenient credit policy can set you up for collection and cash-flow problems later. To mitigate risk, take the time to run credit checks on all new customers and make your credit policy, as well as its consequences, well known to them.

With all of the costs associated with extended credit, it may be wise to choose a simple solution like invoice factoring. This popular financing alternative not only pays you immediately for customer invoices, but also handles tedious customer collections. For those who don’t want to be bogged down by outstanding receivables, credit checks and collection calls, factoring may be the way to go.

Find out more about extending credit to your clients with factoring services by contacting our factoring company today.

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