Extending Credit to Your Customers: Is It Good Business?

You’ve redesigned your marketing strategy. You’ve changed your sales pitch. You’ve launched a product promotion campaign that should wildly entice even the most ambivalent customers. Yet, sales are still stagnating at 1994 levels. What else can you do?

Extending credit to your customers may not be on your agenda, but it should be. Risky? Yes. But, it has proven to be an effective method of accruing a large clientele base and of establishing a healthy rapport with customers. Over the past few years, small businesses have reported that extending credit boosts sales up forty to fifty percent.

Maybe extending credit is not such a crazy idea after all.

WHY EXTEND CREDIT?
Extending credit works in your favor in a variety of ways. One, it increases customer loyalty. Taking a financial risk for your customers demonstrates you trust them and are willing to accommodate them. Your clients will appreciate your professional service and respond amicably to this treatment. By garnering customer loyalty, you will have the opportunity to establish long term business relationships.

A credit policy also indicates your business is financially stable. A business in danger of going under does not give its customers the option of paying at a later date. A struggling business demands payments immediately, in order to keep its sinking operation afloat. Customers do not perceive credit-extending businesses to be teetering on the brink of bankruptcy. They know they will receive their goods and services as promised.

Credit policies increase sales for another reason. Some customers are unable to pay for a product or service in its entirety. If customers have the option to pay for items in monthly installments, they will be more inclined to make purchases which do not fall within their current budgets.

Other times, customers want to see if they are fully satisfied with a product before bringing out their checkbooks. Offering a line of credit to these customers gives them the signal you are confident about your product’s quality. Guaranteeing satisfaction makes frugal customers more comfortable with their purchases. Knowing they can return a purchase, cost and hassle-free, they will likely take a risk in ordering it.

We are all familiar with the last reason why extending credit boosts sales: it is human nature to want to keep hard-earned dollars in our possession for as long as possible. When customers do not have to pay bills immediately, they have opportunities to use their money in more profitable ways. Customers will choose to do business with you over other businesses that do not offer comparable payment plans.

DISADVANTAGES
The financial risk associated with extending credit is a big deterrent for small businesses. Some customers order items they cannot afford, some are not satisfied with what they receive and refuse to pay. Undoubtedly, there will be customers who are tardy with their payments or who do not pay at all. Businesses which extend credit cannot expect to collect all payments.

Other monetary losses are credit bureau fees. When a business extends credit to a customer, it needs access to information regarding a customer’s ability and willingness to pay for ordered items. Credit bureaus meet this need by providing a business with a customer’s payment history, banking record, and yearly income report. Information of this sort unfortunately costs money. However, this expense saves a business money in the long run because credit bureaus identify customers which are financial liabilities.

Another disadvantage of extending credit is time wasted resolving business disputes. Following up on late payments and tracking down delinquent customers are laborious activities which prevent businesses from focusing on more pertinent tasks. Resolving credit disputes can also give rise to expensive legal fees. If disputes are not settled peacefully, some businesses hire collections agencies or sometimes take customers to court.

SHOULD YOU EXTEND CREDIT?
Extending credit is a beneficial activity for your business if you possess a large amount of working capital. Because you will receive delayed payments, cash flow levels will presumably decrease. However, yearly sales revenues may reach unprecedented levels.

Despite the risks involved, extending credit to customers is a sensible sales technique. It increases customer loyalty. It verifies your business’ financial stability. Most importantly, extending credit makes your high quality products and services more marketable. If you have not considered it before, it may be about time. HBM

By Sandra Needham
Originally Published at http://www.homebusinessmag.com/

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