The financial risk associated with extending credit is a big deterrent for small businesses. Some customers order items they cannot afford, some are not satisfied with what they receive and refuse to pay. Undoubt- edly, there will be customers who are tardy with their payments or who do not pay at all. Businesses which extend credit cannot expect to collect all payments.
Other monetary losses are credit bureau fees. When a business extends credit to a customer, it needs access to information regarding a customer's ability and willingness to pay for ordered items. Credit bureaus meet this need by providing a business with a customer's payment history, banking record, and yearly income report. Information of this sort unfortunately costs money. However, this expense saves a business money in the long run because credit bureaus identify customers which are financial liabilities.
Another disadvantage of extending credit is time wasted resolving business disputes. Following up on late payments and tracking down delinquent customers are laborious activities which prevent businesses from focusing on more pertinent tasks. Resolving credit disputes can also give rise to expensive legal fees. If disputes are not settled peacefully, some businesses hire collections agencies or sometimes take customers to court.
SHOULD YOU EXTEND CREDIT?
Extending credit is a beneficial activity for your business if you possess a large amount of working capital. Because you will receive delayed payments, cash flow levels will presumably decrease. However, yearly sales revenues may reach unprecedented levels.
Despite the risks involved, extending credit to customers is a sensible sales technique. It increases customer loyalty. It verifies your business' financial stability. Most importantly, extending credit makes your high quality products and services more marketable. If you have not considered it before, it may be about time. HBM
Go To Page: 1 2
