Small business owners need to attract customers to generate revenue. Offering incentives is one way to get a customer to consider choosing your brand over the competitors. Providing credit to customers is one way to entice people to buy your products or pay for your services. However, this comes with benefits and risks you should know about.
Here are the advantages and disadvantages of opening a line of credit to customers.
Provides Opportunities for More Sales
An extra payment method gives you more chances to generate revenue. Some customers prefer using credit other than cash. Providing them with credit enables your small business to entice them to choose your products instead of competitors. Offer flexible payment terms to allow a customer to purchase more items.
Better Customer Relationships
Providing credit to customers improves your relationship with them. It shows you trust and value them to pay their dues on time. You can also provide your loyal customers with better terms, especially if they pay early. This approach strengthens your business relationship with customers and they might refer you to their networks.
Keeps Your Small Business Competitive
Your competitors might already be offering credit to their customers. Following their strategy will be in the best interest of your small business. Implement and adhere to policies to prevent delays and problems. Always credit check customers to determine if they are financially capable of paying their dues on time.
Cash Flow Disruption
Proper cash flow management is important to the survival and success of your small business. Customer credit can disrupt cash flow because of late or non-payments. You might have a cash shortage that may make it difficult to address immediate operational and financial needs. If you will offer a line of credit to customers, create payment lengths and terms that are in your favor. This approach allows you to keep cash flow positive for salaries and immediate monetary needs.
Unfulfilled Payments
Credit payment increases the risk of non-fulfillment. Some customers may pay late or not at all because of their own cash flow problems. This has a negative effect on your accounts receivables and balancing of financial statements.
These are some of the pros and cons of offering a line of credit to customers. It is beneficial to provide credit. However, you should review the credit score and financial situation of a customer you plan on giving it to.
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