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Posted by Matt Osborn - 28 June, 2019

The Best 5 Reasons For Businesses to Extend Credit

Allowing customers extra time to pay their bills can provide a number of advantages to your small business. Namely in the form of growth. When you extend credit to customers, you allow them extra time for payments. In this article, you'll learn about several ways to extend credit and the many advantages that go along with them. The article will wrap up tips on how to better ensure your credit extension program is a success.

1. Additional Cash Flow

If customers can put off payment without consequences, they will. Given a choice between a company that offers net 30 or 60 payment terms 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 now offers favorable payment terms, potential customers will start looking to do business with you.

2. Additional 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 extension 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.

B2B Credit

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, such 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. Additionally, you build more customer loyalty.

3. Higher 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 any 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.

4. Leverage During Negotiations

How can extending credit help you win more business during purchase negotiations? Consider a customer who is on net 30 terms. They want to purchase $50,000 worth of machinery, which is $30,000 more than their average purchase. They'll purchase from you if the price can be decreased to $40,000. Rather than losing $10,000 on the sale, you decide to offer the customer net 75 payment terms for this specific purchase. This provides the customer with an additional 45 days to come up with the $10,000 difference. The customer likes the new terms but needs a price of $47,000. You agree. 

In the above negotiation, you've basically saved $7,000, while increasing cash flow by $47,000 across 75 days. You'll of course need to manage the 45-day day gap, as it is 1.5X more than your normal 30 days. All in all, the trade-offs seem to certainly be worth it.

5. Simple Technique For Extending Credit

A full credit policy might be more than you're willing to bite off. If you'd like to extend credit to customers at a slower and much simpler pace, offering credit cards and other financing options are an excellent way to do it. Customers will automatically get a grace period on their payments. You won't have to worry about creating and managing a new credit policy. The financing company will handle the collection of payments, processing of payments, and risk management.

Some downsides to offering financing through third parties include:

  • Fees, which can be high
  • Inability to offer custom payment terms
  • No ability to negotiate with customers in the case they are rejected for financing

B2B Credit DSO payment

Tips To Keep It All Running Smooth

There are risks involved when you extend credit to customers. There's risk the customer won't pay. There's risk the customer will pay late. You also have 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.

Extend Credit B2B

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. Higher risk might mean more stringent terms such as net 30 or even rejection. While a low-risk customer may get net 90 terms. What those terms are and how you determine them should be in your credit policy.

Extending credit to customers is a great way to grow a small business and build customer loyalty. In addition to increased sales from existing customers, you'll likely find that it is also easier to acquire new customers.

Control your company's cash flow

Topics: Finance, B2B Sales, Credit, Management, Sales & Marketing