In the current climate it’s highly likely you’ve already been asked to extend credit terms to your customers. Small businesses are under increasing pressure from every angle; many need to request extended payment terms to relieve their own cash flow issues resulting from the pandemic, or their larger customers are imposing longer credit terms on them, knowing that there’s little they can do about it. 

Allowing customers to attain goods and services and pay for them later can be beneficial to both buyer and seller, however it should be done in a way that doesn’t harm cash flow and subsequently the ability of the seller to meet its own financial commitments. 

What are the benefits of extending credit? 

The primary reason for any B2B organization to extend credit is to grow business, this can be achieved by;

• Offering credit to customers when your competition can’t which puts you at an advantage and builds a positive  and trusting relationship;
• Generating more revenue through offering credit so customers may buy more;
• Enhancing the brand reputation – offering credit implies financial stability and this can serve to draw even more clients and improve reputation in the industry and surrounding business communities;

What are the risks involved in extending credit? 

Unfortunately all businesses will have customers who delay payments until the very last hour or even worse, make payments late after multiple times of chasing and this can expose the business to some risks they’ll need to mitigate against. 

• Chances are if you start offering credit to customers that usually pay upfront or on previously strict 30-day terms, cash flow becomes more difficult to predict and it only takes one or two late payments to disrupt business negatively. 
• If you extend credit and then have to pursue an unpaid debt through a collection agency, you won’t get the full amount of the debt repaid and this kind of defeats the object of offering extended credit in the first place. 
• To start offering credit you might need to consider accounts receivable (A/R) management if there hasn’t been someone in the business dedicated to the role previously. As mentioned, cash flow becomes unpredictable and managing A/R zaps more time than you might think; it’s vital to keep on top of invoicing, disputes and late payments to avoid payments falling through the cracks or impacting your ability to meet your own accounts payable. 

How to mitigate the risks of extended payment terms

A clear and concise credit policy is a good starting point for any business thinking about extending credit to customers. Documentation should cover which customers qualify, for how much and what procedures are in place to monitor that facility. Additionally, there should be a policy as to any penalties that might be applied for late payment and how any debt will be collected. The main thing to bear in mind is that there’s no ‘one-size-fits-all’ approach, payment should be tailored to each customer equipped with a clear policy and their payment history in the case of an existing client.  

Some of the other things a business can consider are;

• Offering customers a variety of payment methods and ensure they’re comfortable with one or two of these to cover all bases;
• Putting credit terms in writing;
• Implement a trade credit application process which asks for current trade references, banking information and authority to run credit-checks. 
• Use business credit scores from one of the major credit score bureaus to determine creditworthiness of clients;
• Exchange payment data with credit bureaus to discourage customers from late payments.

Extend credit the right way and grow business

Whilst it can be extremely advantageous for businesses to extend credit to their customers, it should never be done if you’re already facing severe cash flow concerns. This situation can be frustrating for business owners because they have the opportunity to expand and take on new customers but maybe can’t access traditional finance to fund their short-term obligations. Accounts receivable (A/R) financing can be a viable solution to this.

Using A/R financing not only frees up valuable cash locked in unpaid invoices, the financing company usually provides value-add services by way of vetting new customers for credit, assessing their creditworthiness and managing the accounts receivable function for the business so that they don’t have to carry the administrative burden of chasing invoices. 

For assistance with cash flow and credit management, please don’t hesitate to reach out to the Sallyport team.