Sep
30
Extending credit to your customers – Is it a good idea?
30-09-2011
Tagged Under : Customers, Customers Good
You, as a small business owner must often have been confused whether or not to extend credit to your business customers. Such an important decision has to be taken by taking into consideration a lot of things. First of all the decision may not be consistent for all customers. You should only extend credit to those customers whom you trust enough. There are both pros and cons for extending credit to your customers. Read on to know about them.
Advantages of extending business credit:
There are quite a number of advantages for extending business credit. These are explained as follows.
- Greater market share – You can attract more number of customers and get a greater share in the market if you offer products on credit to your customers. This will help you to gain more profit in future when the customers have paid their share of money for the items that they have purchased.
- Higher amount of sales – It may so happen that many of your customers might be unable to buy certain things because of lack of funds at that point of time. In such situations if they are able to buy products in credit, the number of items that you will be able to sell can rise up drastically.
- Getting an edge – You can get a competitive edge when pitched against other businessmen who do not offer products on credit. You may also have an upper hand over other businesses where the practice of selling product on credit is not much prevalent.
- Norm of the industry – If you are in an industry where it is a norm to sell products in credit, you may have to extend credit just to be a part of the industry.
Disadvantages of extending business credit:
There are also quite a number of reasons for which you may decide not to extend business credit. These are elucidated below.
- High cost of business – If you want to extend credit to your customers. Then you have to incur a number of costs associated with it. You should firstly run a credit check on the customer to know about their creditworthiness for which you have to pay. Secondly, since your cash is being tied up as you are extending credit, you have to procure cash from elsewhere which can become quite costly for your business.
- Greater financial risk – If you are the owner of a small business, you already have a number of worries looming large over your head. On top of that if you extend credit to your customers, you project your business to a greater financial risk. This is because there maybe customers who won’t pay their bills on time and some customers won’t pay at all.
- Cash is engaged – A small business needs all the amount of cash it can put its hands upon. You would need cash to build your business and start trading. You would need cash to establish your business and start reaping profit. Thus extending credit at such juncture is not advisable at all as it will tie up quite an amount of cash that could have been used for business.
- Hassle of keeping record – If you sell products to customers on credit, you have to keep a record oh whom you have sold what and how much amount is due. Also if a customer doesn’t pay the bill for a long time, you have to report him to the collection agency and thus you have to incur an extra cost, that of the collection agency.
Thus after evaluating the pros and cons of extending credit to your customers you can decide whether you should go for it or not.
