Credit is simply allowing clients, whether it’s Business to Business (B2B) or Business to Client (B2C), to acquire your product or service with the assurance that they will be pay within a (usually) pre-agreed timeframe.
In theory, this is an effective way of boosting sales and building your clientele. However, in practice, extending credit necessitates multiple factors such as trust, reliability, a robust source of income and much more. It is of the utmost importance to delve into the factors you should consider before extending business credit. Extending business credit can make or break your company, it is the “largest use of capital from B2B, [and the] single largest source of small business lending in the US today.” (Carbajo)
Why succumb to the risks of extending business credit when you can avoid them with a few simple steps? First and foremost, it is important to know what those risks are.
By extending business credit you are, in essence, trusting a business to reimburse you with the fixed amount on a previously set date – but what are the assurances of this? Imagine you lent a friend ‘x’ amount on Monday and trusted him/her to pay you back on Thursday, which both parties agreed upon. Now, between Monday and Thursday, there could be a multitude of factors that can prevent this agreement being adhered to. Your friend could lose his/her money, it could be stolen, he/she could go into hiding. There is a multitude of other scenarios that are entirely out of your control, and the same applies in business.
When extending business credit, the amount would, most likely, be much greater than you would lend to a friend. There are also, potentially, a vast amount of issues that may occur, inevitably resulting in non-payment and/or the loss of capital. This loss may impact your company in irretrievable ways, and in some cases, it could sink your business. The failure of just one client to pay for your services on the set date could directly interrupt your cash flow, even if you were wise enough to take out credit insurance. Additionally, if you’re chasing up a payment that is long overdue, you may find yourself knee deep in external expenses, such as lawyers and collection agencies. Moreover, financial harm is only one factor to consider, other risks such as time management may have just as detrimental effects on your business if you do not take the required precautions when extending credit. Chasing up late payments can become time-consuming, long-winded and, overall, distracting from your normal day-to-day routine and this can negatively affect your company.
Extending credit shouldn’t be seen as a negative though. When done correctly, it can unlock an array of potentials that are beneficial to the development of your business. It is advisory to do your research before giving credit and take all of the required steps to minimise risk in order to capitalise on the potentially boosted sales that extending credit – securely and wisely – could enable.
Knowledge is Power – What You Need to Know
- Credit Policy: If you plan on extending credit, it would be wise to implement a credit policy. This can outline the terms and conditions, covering the entire process. Decide what levels of due diligence are required for various amounts (will a KYC check or credit report suffice or is it wise to conduct enhanced due diligence for larger amounts), have a standard payment term that suits your cash flow, include legal factors such as local or regional payment directives, how will you chase payments, how often and at what stage you will freeze accounts or bring in debt collectors. Document all the processes and do your best to adhere to them.
- Credit Review:Reviewing an organised record of clients and the quantity offered to them, via credit. This will be beneficial when calculating your cash flow, to ensure you have enough money to give credit. A structured file of who you’ve given credit to can offer insight into the more reliable businesses, which you could assess and then perhaps increase their credit limit.
- Credit Terms: Here is where you can decide how much credit you are willing to give and, importantly, the due date of when you expect payment. Furthermore, you can reduce risk by asking for down payments, if that’s 20%, 40% or more, down payments may well be a strong indicator of how dependable a business is, and at less of a risk. In future, you could reduce the down payments with your more reliable clientele.
- Credit Risk: This is an important element to consider. How much risk are you willing to take? Do you have the financial resources to stay afloat over multiple transactions? You need to decide when the risk is just too high and, understand in the case of failure to receive payment, your company will still be financially secure.
- Credit Qualification: It is smart to assess how qualified a business is, before extending credit. What is their creditworthiness? From a simple background check to a more detailed report, understanding the stability of your clientele before extending credit may be crucial. A robust, financially secure and trustworthy clientele can ensure long-term stability in your own business.
The Cedar Rose Solution – Minimise Risk and Maximise Efficiency
Cedar Rose offers award-winning credit reports, both automated – using our CR Score and manual – utilizing our team of multilingual business researchers. Our CR Score can determine how risky it would be to extend business credit. On a scale from 0-100, you can instantly visualise the reliability of your clientele, making informed, accurate and responsible decisions to avoid the risk of losing money.
Our freshly investigated credit reports can be delivered in as little as 24 hours and provide detailed information about your prospective clients in 170 countries. We also provide continuous monitoring at a small additional cost so that you can be notified if a change is made to your client’s credit file or registration details for a full year following your credit report purchase.
The combined result of these factors inevitably concludes in an excellent quality report that allows you to grasp a clear picture of who your customers and suppliers really are – this can be fundamental when deciding to extend business credit. For individual country prices, see our website Cedar-Rose.com or for a full price list, email firstname.lastname@example.org. Furthermore, the range of detailed reports stems from a simple KYC (Know Your Customer) report to a fully comprehensive Due Diligence report.
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Written By Jack Evangelides, Marketing Intern
Carbajo, M. (n.d.). The Dos and Don’ts of Extending Credit to Customers. Retrieved September 19, 2018, from All Business: https://www.allbusiness.com/the-dos-and-
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*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***