The Pros and Cons of Offering Credit to Customers + How To Get Started

6 Pros of Offering Credit

The advantages of credit for businesses are often too good to pass up. Here’s a rundown of what you stand to gain by offering credit to customers.

1. It Provides a Competitive Edge

Customers seek out businesses that offer credit due to the benefits it provides to their own cash flow. If your competitors do not offer credit, you can gain an edge over them in the market by doing so.

On the other hand, if your competitors offer credit, your business will need to offer at least the same credit terms to appeal to customers. You’ll need to offer even better terms to maintain that competitive edge.

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Nuvo Tip:

79% of consumers expected large national companies and local service providers to have the same payment options.

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2. It Expands the Potential Customer Pool

Aside from simply appreciating the option of buying on credit, some customers require credit purchases to stay operational. Offering credit to customers can lead to increased sales by making your services affordable. Otherwise, you’ll be excluding a large portion of the market, limiting your sales to fewer customers.

3. It Enables More Frequent Purchases

Just as some customers need credit to make purchases, many like having the option to make a purchase when they need to, not just when they have the cash on hand. Offering credit allows them to pay with the revenue generated from a later sale. Without the option of credit, their cash reserves may not enable them to buy from you, leading to the possibility of them going to a competitor who offers credit.

4. It Boosts Customer Loyalty

Extending credit to customers is a show of trust between you, indicating you believe in their business and respect them. Customers often reward this sign of confidence with continued business, not wanting to burn bridges with a company that’s facilitating their success.

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Nuvo Tip:

In 2016, nearly three-quarters of consumers said their satisfaction with a company could be improved by having multiple billing and payment options.

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5. It Strengthens Your Company’s Reputation

Word spreads fast when a company offers a great deal, the same way people tell their friends when a sale is going on. Extending credit allows your customers to talk to their peers, providing publicity for your company. Getting the market to talk about you in a positive light is a great way to improve your brand.

6. It Displays Company Stability

When a company first gets up and running, they’re likely operating on thin margins, making it difficult to offer credit to customers. This is also when the company is at the biggest risk of going out of business.

Customers are usually looking for long-term relationships with their suppliers. By being able to offer credit, you’re showing your business is stable and will be able to work with them for years to come.

5 Cons of Offering Credit

Despite its many benefits, there are some disadvantages of offering credit.

1. It Puts Your Cash Flow at Risk

The natural result of offering credit to customers is that you will have access to less cash at any given time. With product leaving faster than cash is flowing in, you may not be able to replace your inventory or cover expenses immediately. You can mitigate this by keeping a close eye on the amount of issued credit and adjusting your offerings accordingly.

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Nuvo Tip:

In 2020, it took more than 20 days for 80% of businesses to collect outstanding receivables.

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2. It Increases the Occurrence of Delinquent Accounts

Regardless of how tight your credit policy is, you’ll still run into customers who fail to uphold their payment terms and miss due dates. This can exacerbate the issue if your cash flow is already small due to offering credit. One way to handle this issue is by having an effective dunning process that increases your chances of successfully getting paid.

3. It Can Lead To Costly Collection Fees

If customers fail to respond properly to your past due notices, the next step will be sending the invoice to a collection agency. With a little luck, you’ll be able to recoup some of the debt, but not all. You may even take the customer to court if the debt is large enough, adding in costly legal fees.

4. It Increases Pressure on the Accounts Receivable Department

Offering credit adds a number of extra processes that your accounts receivable team will have to execute. You may need to hire new employees to help with the added responsibilities, like approving credit applications and issuing invoices and keep the team from being overwhelmed.

5. It Can Cause Your Company To Have Bad Debt

Overdue invoices can create a snowball effect hurting other areas of your business. Even one missed payment can lead to costly bad debt if your product is expensive. Bad customer debt will make it harder for your company to cover its own debt.

How To Determine If You Should Offer Credit To Customers

The benefits of offering credit to customers usually outweigh the risks for businesses, so it’s important to research if it’s the right decision diligently. Here are some ways to help determine that:

• Can your cash flow accommodate it? To offer credit to customers, you’ll need to dependably have enough cash on hand to cover your expenses while waiting for payments.
• Do you have a large pool of clients? The smaller the number of clients you have, the riskier it is to offer credit since you’ll have fewer payments coming in at any time. 
• Can you handle delinquent accounts? Missed due dates will happen on occasion. You’ll need to be able to cover these interruptions in your schedule for credit options to be successful.

If you answered yes to all of these questions, then your company may be able to start issuing lines of credit.