Extending credit works in your favor in many ways.
It increases customer loyalty.
Taking a financial risk for your customers demonstrates you trust them and are willing to accommodate them. If you extend credit be sure you have a credit policy in effect.
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. Be sure to mark your terms clearly on any invoices and statements you send out.
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.
Extending credit also has downfalls such as your business could lose interest that you could have earned, even if you put it into a low interest savings account. You can’t take advantage of purchase discounts from your vendors if the funds are not
immediately available or they are paying on terms.
You may lack the capital to produce the next job, and may be forced to decline profitable deals from good payers.
Some reasons for extending credit are to meet or beat the competition. If your competitors are extending credit you may want to offer the same. It may be more convenient for your customers to be billed for your product or service. Extending
credit may also increase sales. You can also use extending credit as a way to establish new accounts.
Keep in mind that extending credit will take more time and money than you are already extending. Someone will have to take the time to check references, process credit applications, set up new accounts and maybe collect on accounts that you do extend credit to that don’t pay on time.
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