Offering credit to customers

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Offering credit to customers can speed up their invoice payments, increase the amount of their spending, and even help businesses gain a competitive advantage in their market or industry.

However, weighing up the probability of increased sales with the risk of reduced cash flow, as well as the nature of a business and the size of the transactions are important factors when managing risk in a business.

Owners who are considering offering a credit option to some or all of their customers should consider the following risks:

Reduced cash flow
You may end up waiting for customer payments which then reduces your ability to purchase replacement products from suppliers.

Reduced profit margin
Funding credit sales will reduce a business’s profit margin. The cost of this will show on a business’s profit and loss statement, so owners should keep this in mind when they put a price on their products and services.

Large debts
Unpaid debts can pose quite a risk to a business. This is particularly the case when owners are exposed to large single transactions.

Performing a credit check is one way owners can manage the risk of bad debt. This involves customers completing and signing a credit application form or agreement before being offered credit. Owners need to collect:

  • the customer’s signature and a written confirmation that they have read, understood and will abide by all terms and conditions
  • identification and contact details
  • approval to conduct a credit check where necessary

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