Allowing business customers extra time to pay their invoices can provide a number of advantages to your organization. Namely in the form of growth and efficiencies.
When suppliers extend credit, business buyers are allowed extra time for payments. In this article, we’ll discuss three key benefits of extending trade credit to business buyers.
1. Increased Cash Flow
If customers can put off payment without consequences, they will. Given a choice between a company that offers net 30 vs. another that requires immediate payment, the net 30 company has a higher probability of winning more business.
Knowing that more customers will gravitate to better payment terms, extending credit is a great strategy for increased cash flow. It works for your existing customers and new customers. As word gets around that your company offers favorable payment terms, potential customers will start looking to do business with you.
2. Increased Sales
Additional sales will come in the form of customers spending more money on your products and services. With their payments due at a later time in the future, customers don't have to worry about an immediate decrease in cash flow for obtaining products or services.
Credit extensions can lead to bigger ticket purchases as well. Part of your credit extension policy may include payment plans for large purchases rather than net 30 or 60 terms. Both terms are still extensions of credit but the payment plan adds some creativity to your credit policy and increases sales.
An extension of credit can take on many forms. Another creative strategy is to extend payment terms out longer for higher-quality customers.
Rather than net 30, customers may get net 60 but only for certain purchases. By restricting net 60 to certain purchases, your cash flow isn't as impacted by the longer payment terms, and you have the opportunity to build customer loyalty.
Suppliers with B2B e-commerce sites may also see increased cart size or average order volume (AOV) along with more frequent and repeat orders when offering extended credit.
3. Increased Customer Loyalty
Great payment terms can lead to higher customer loyalty. Customers like doing business with someone who is easy to deal with, in addition to having the quality products they want.
Being easy to deal with means payment terms that allow customers to better manage their cash flow and purchase products that they would not have otherwise been able to purchase.
Customers begin to realize that you are meeting all of their needs and eventually stop looking for alternative providers. This saves them time and effort while increasing your sales and reducing costs. Cost reductions come in the form of reduced marketing for new customers.
You may find that many small-to-medium-sized organizations do not have the same access to working capital and are therefore dependent on the seller to offer net terms. Merchant suppliers that aren't extending trade credit to these SME buyers are missing the opportunity to capitalize on the full growth potential of these small-to-medium-sized buyers.
Tips For Extending Credit Smoothly
There are risks involved when you extend credit to customers. There's the risk the customer won't pay, the risk the customer will pay late, and the risk that the customer pays only part of the amount due. A good credit policy can help guard against these risks.
A credit policy outlines all of your credit extension terms and how various scenarios, like those mentioned above, will be handled.
It's a manual for how the process works and what to do when things go wrong. With a credit policy, both your employees and customers fully understand and know what to expect when credit is extended.
While you may not need it now, finding a reputable collection agency and understanding their process along with costs should also be part of your credit policy.
Your credit policy will tell you what to do when a customer is late. As a customer continues to be late and the probability of receiving payment is very low, you may find it is probably time to initiate collection through a collection agency.
One of the first steps to extending credit to a customer is a credit application. This will allow you to gather information about the customer and their business through a credit report. You can then determine how much risk may be involved in extending credit to this client.
The higher the risk the more stringent the terms. High-risk customers may get net 30 terms or even rejection, while low-risk customers may get net 90 terms. Your credit policy should highlight what terms your company offers and how you determine who gets what terms. In this case, it may be worth looking into trade credit insurance such as Allianz-Trade to better protect your business while still cashing in on the potential growth extending credit can offer.
Although there is undeniable risk involved, extending credit to customers is a great way to increase revenue and build customer loyalty.
Are you looking for a way to automate your B2B company's credit management and mitigate risk when extending credit to new customers? Whether you're an electronics distributor or food manufacturer, Apruve can help. With Apruve, you can easily extend risk-free credit to your customers worldwide, and make sure you get paid within days. Learn more about Apruve's credit network or contact Apruve’s specialists to sign up for a demo today!