EXTENDING CREDIT to Your Customers… Is It Good Business?
By Sandra Needham
You’ve redesigned your marketing strategy. You’ve changed your sales
pitch. You’ve launched a product promotion campaign that should wildly
entice even the most ambivalent customers. Yet, sales are still
stagnating at 1994 levels. What else can you do?
Extending credit to your customers may not be on your agenda, but it
should be. Risky? Yes. But, it has proven to be an effective method of
accruing a large clientele base and of establishing a healthy rapport
with customers. Over the past few years, small businesses have reported
that extending credit boosts sales up forty to fifty percent.
Maybe extending credit is not such a crazy idea after all.
WHY EXTEND CREDIT? Extending credit works in your favor in a variety of
ways. One, it increases customer loyalty. Taking a financial risk for
your customers demonstrates you trust them and are willing to
accommodate them. Your clients will appreciate your professional service
and respond amicably to this treatment. By garnering customer loyalty,
you will have the opportunity to establish long term business
relationships.
A credit policy also indicates your business is financially stable. A
business in danger of going under does not give its customers the option
of paying at a later date. A struggling business demands payments
immediately, in order to keep its sinking operation afloat. Customers do
not perceive credit-extending businesses to be teetering on the brink of
bankruptcy. They know they will receive their goods and services as
promised.
Credit policies increase sales for another reason. Some customers are
unable to pay for a product or service in its entirety. If customers
have the option to pay for items in monthly installments, they will be
more inclined to make purchases which do not fall within their current
budgets.
Other times, customers want to see if they are fully satisfied with a
product before bringing out their checkbooks. Offering a line of credit
to these customers gives them the signal you are confident about your
product’s quality. Guaranteeing satisfaction makes frugal customers more
comfortable with their purchases. Knowing they can return a purchase,
cost and hassle-free, they will likely take a risk in ordering it.
We are all familiar with the last reason why extending credit boosts
sales: it is human nature to want to keep hard-earned dollars in our
possession for as long as possible. When customers do not have to pay
bills immediately, they have opportunities to use their money in more
profitable ways. Cust- omers will choose to do business with you over
other businesses that do not offer comparable payment plans.
DISADVANTAGES 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
Originally Published at http://www.homebusinessmag.com/
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