Extending Credit: A Primer for Small Business Sellers

A primer on how much credit you should be extend to any given customer and the impact of risk versus reward.

The “granting credit to customers” is a primer for small business sellers. It will teach you how to offer your customers the best customer experience possible by granting them credit.

Customers who are given credit may buy products and services now and pay for them later. Credit is often a win-win situation for both retailers and customers. Customers who aren’t restricted to the cash they have on hand at the moment of the sale have greater buying power and are more likely to purchase more. Extending credit to your consumers may help your business by developing trust and boosting customer loyalty.

It’s critical to convey your credit conditions properly and to complete your due research in terms of just lending to reliable consumers in order to build a successful credit policy. To help with cash flow, invoice factoring might be combined with customer credit.

Pros & The Drawbacks of Giving Customers Credit

Extending credit to clients may boost sales, provide you a competitive advantage, and help you build deeper customer connections. You do, however, face the danger of not being paid. The trick is to keep track of outstanding bills to avoid them becoming overdue.

• Advantages of Giving Customers Credit
• The Drawbacks of Giving Customers Credit

• Increased sales: When customers don’t have to pay for products or services up advance, they are more likely to buy more. This implies more sales, which equals more profit for your company.
• Competitive advantage: Providing credit to consumers gives you an advantage over rivals who do not. Consumers may choose to do business with you over a rival that does not provide credit to their customers as a result of this.
• Customer loyalty: Customers will develop confidence in you over time as they realize they can depend on you to supply them with the goods and services they need without having to pay for them up front. This might lead to a lucrative and long-term connection in the future.

• Payment delay: There will be a time delay from the moment you offer products and services and when you get paid, depending on the payment conditions. If your typical terms are Net 30, this might be as long as 30 days. You might resort to an invoice factoring business to receive the cash you need to avoid the payment delay.
• Risk of not being paid: When you supply products and services on credit, you always run the risk of not being paid. You may reduce the likelihood of this happening if you examine the customer’s credit history, demand an advance payment, and keep track of delinquent bills.
• Investing time to keep track of overdue invoices: When it comes to handling your accounts receivable, you’ll need to be more organized than when it comes to cash sales. Unpaid bills must be addressed by you or your bookkeeper by requesting payment by email, phone, or, if required, by mailing a collection letter.

Consider These Factors Before Extending Credit

Customers that are more loyal and trustworthy than others exist in every company. Fortunately, you have the last say over which businesses you choose to offer credit to. Customizing payment terms for each client and developing a credit policy are two things to think about before giving credit.

Each customer’s payment terms should be customized.

If a client has solid credit and has paid their bills on time in the past, you may expect them to pay you on time as well. If a consumer has low credit or a history of delinquency, you may want to delve into their financial history more. Depending on whatever credit reporting agency you select, a credit report will cost you between $29 and $229. Learn more about the credit bureaus, how to get a credit report, and what to look for in our business credit report guide.

Set payment conditions depending on the facts you uncover after checking the credit report. Customers with excellent credit have traditionally had lengthier payment periods than those who have had trouble paying their bills on time.

While Net 30 payment terms are the industry norm, you might opt to provide various terms. Your top clients may be entitled to 60- to 90-day periods, while new customers may be given 30-day terms to begin with. Learn how to choose the best terms for your company by reading our guide to invoice payment terms.

Establish a Credit Policy

You must have a written credit policy in place before granting credit to consumers. Payment periods, fines, interest for late payments, and the collection procedure for unpaid bills should all be addressed in your credit policy.

A list of approved payment options should also be supplied, as well as thorough instructions on how to send money. Prior to delivering items or services on credit, you should examine the policy with your consumers and have them affirm that they agree to the conditions.

A credit policy should contain the following:

• Unless you have a home office, give precise information about how the consumer may contact you, such as your company phone number, email address, website, and physical location.
• Terms of payment: This is the due date for the payment, such as Net 30 or 2/10 Net 30.
• Interest and late costs: Specify what rate of interest or late fees will be charged, as well as when these charges will begin, such as two weeks after the due date or one month later.
• Acceptable payment methods: Inform customers whether you accept cash, credit or debit cards, checks, automated clearing house (ACH) transactions, or wire transfers; for credit and debit card payments and wire transfers, include instructions on how customers can make these payments, such as online or over the phone.
• Include the postal address where consumers may submit checks in the remit to address.
• Payments that are past due: Indicate when a payment is past due, such as 60 days after the invoice due date.
• Collection process: This is the procedure you’ll use to collect payment on past-due accounts. It could include calling the customer and then sending a written letter requesting payment; it could also include hiring third-party collection agencies (if you’re not sure what information to include in a collection letter, see our article on how to write a collection letter for detailed instructions and a free template).

Invoice factoring may assist with cash flow.

Extending credit to clients might help your company develop in the long run, but when there is a time gap between purchase and payment, cash flow can become a headache. Factoring invoices is one approach to bridge cash flow shortages. In return for sending delinquent bills to the factoring business, it advances your funds straight away. It’s a terrific option for companies who want to provide consumers credit but need assistance managing their cash flow.

Typically, invoice factoring providers advance 70% to 90% of the invoice amount up front. The expense of having your cash locked up in invoices is typically more than the invoice factoring company’s costs.

Factoring: Recourse vs. Nonrecourse

When drafting an invoice factoring agreement, one of the most crucial factors to examine is whether the agreement is recourse or nonrecourse.

• If your client fails to pay its invoice, recourse factoring permits the factoring provider to demand recovery of its advance. If the client fails to pay, you will be liable for paying the invoice under this agreement.
• Nonrecourse factoring: If the client fails to pay the invoice, the factoring business is accountable for it. When a consumer is unable to pay owing to insolvency, which generally implies bankruptcy, most nonrecourse agreements apply. Some variables, such as a client closing its doors without declaring bankruptcy, have more broad definitions of insolvency than others.

Because of its speedy application and financing procedure, we chose FundThrough as one of the top invoice factoring firms. Check out our post on the top invoice factoring providers for additional information about FundThrough and our other choices.

Conclusion

Extending loans to consumers is critical to the success of many small companies. Set explicit conditions, monitor payment dates, and only give credit to consumers you trust when building a credit policy. Consider employing invoice factoring to help your cash flow when extending terms to clients if cash flow is an issue.

“Small business credit terms” is a primer for small business sellers. It discusses the different types of credit, what they are good for, and how to extend them. Reference: small business credit terms.

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