When Is It a Good Time to Extend Credit?
When you start a business, some things come easy and are intuitive. Usually, those things relate to the actual “doing” of the part of the business that you love to do – the florist loves working with flowers, the speaker loves to give speeches.
Other things, like hiring, firing, finance, budgets, insurance, and so on are usually not so simple (and by the way, I have a great website for self-employed business owners that helps with those sorts of issues). Among the things you can add to this list is the extending of credit to customers.
On the surface of it, extending credit to a customer may seem like a no-brainer: there is a lot of competition out there, and if extending credit to someone helps you get or keep a customer, then you should do it, right? Not necessarily. There is a lot more to the offering credit computation than being a good guy. Here are the pros and cons:
Pros of Extending Credit
You will get more business: Customers will certainly take advantage of your offer of credit, and you will definitely get more business. But are they the type of customers you want? Good question; see below.
You will make customers happy and loyal: By extending credit to customers, you will indeed be seen as a good guy and a good company with whom people will want to do business. Customers will appreciate that convenience. And moreover, it is common to extend credit and to invoice monthly. All of this builds loyalty, and we all love customer loyalty.
Customers will spend more money with you: Statistics show that customers who buy on credit tend to spend more than customers who pay at the time of purchase.
Customers will trust you more: A company that offers credit terms is seen as stable, reliable, and trustworthy. Extending credit is seen as a sign of being a mature company.
So there are plenty of good reasons to offer credit terms to your customers. But as indicated, the analysis cannot stop there, as the downsides number more than just a few.
Cons of Extending Credit
What sort of customers will you get? Most of your customers who ask for credit terms will be great customers and will pay you on time. But as for the others, the question is: If they cannot afford to pay you now, when they need and want what you are selling, will they be able to do so later? It is an important question to consider.
It will affect your cash flow: Without extending credit, your income every month is what it is. When you start offering credit, your cash flow will be somewhat disrupted. Many companies do not pay until Net 30 or 60 (30 or 60 days after the invoice). Others fall further behind. All of that affects cash flow.
You will have to collect: Credit means invoicing every month, and invoicing means collecting. As indicated, some accounts will be easier to collect on than others. And those others take time.
People may take advantage: Do you see a theme here? Most people will be responsible customers, but there will be a few bad apples.
You will lose customers: Personal story: I have someone who has been a customer for four years. While he never paid consistently on time, he always eventually paid. But recently, he hadn’t paid his invoice in over four months. I gently but firmly inquired about this, two months in a row. The second time, he got so mad (“I have been a good customer for years!”) that he decided to move on. That was fine by me.
Bottom line: Extending credit is something that you need to consider judiciously.