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 insurance that they will be paid for on a set date. Practically, clients can make purchases without paying for anything, on the premise that they will be paid for on a later date. 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)
Don't succumb to the risks of extending business credit when you can avoid them with a few simple steps. First and foremost, what are the risks?
By extending business credit you are, in essence, trusting a business to reimburse you with the fixed amount on a previously set date, however, 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, in which both parties agreed upon. Now, between Monday and Thursday, there may be a rollercoaster of factors that can prevent this agreement from commencing. Your friend could lose his/her money, he/she could 'run away' or a multitude of other scenarios that are entirely out of your control.
When extending business credit, the amount you are extending would be far superior to what you would lend to a friend. There are also a, potentially, vast amount of issues that may occur, inevitably resulting in 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. Additionally, if you are chasing up a payment that is long overdue, you may find yourself knee-deep in external expenses, such as lawyers, collection agencies and credit checking. Moreover, financial harm is only one factor to consider, other risks such as time management may have just as drastic 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 that can negatively affect your company. Extending credit should not be seen as a negative when done right, 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 provisions that can minimise risk, so you can capitalise on all the wonders that extending credit has to offer.
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- 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. For example, the policy can provide a detailed report on applications submissions, overdue collections and all credit-related activities.
- 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 have given credit to can offer insight into the more reliable businesses, which you could assess and then 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 is 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 risky and, 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.
At Cedar Rose
, we offer a credit score, the CR Score
in our credit reports. This advanced tool can make a difference for your business and pave the way for its future success. It can determine how risky it would be to extend business credit. On a scale of 0-100, you can visualise the reliability of your clientele, making informed, accurate and responsible decisions to avoid the risk of losing money. This scorecard produces detailed information to ensure safe passage for your business. With two and a half years of planning for perfection, twenty fields of data to guarantee a detailed report and an overall summary using artificial intelligence, our CR score is just what you need and adds additional value to our award-winning credit reports
We provide in-depth investigations through accessing and verifying data, using artificial intelligence and machine learning to identify errors or anomalies as well as links between companies and people, conducting manual research and analysis as well as providing automated credit scores. The combined result of these factors inevitably concludes in an excellent quality credit 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. Furthermore, the range of detailed company risk analysis reports stems from a simple KYC (Know Your Customer) check report to a fully comprehensive Due Diligence report.
Bibliography 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-donts-of-extending-credit-to-customers-13632208-1.html
*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***