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;
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.
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;
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.
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