Today, with increasing options to buyers, most businesses are offering additional incentives to its customers which include credit sales. It is widely believed that offering credit can;
- Encourage customers to spend more, which can result in increased sales.
- Increase customer goodwill and build good customer relations.
- Make your customers less sensitive to price and more focused on the services you offer.
- Another factor that may make you offer credit to your customer may be your competitors who simply force you to offer credit. You may have to provide credit not just to increase sales but to maintain the same customers.
Extending credit to customers can be tricky and it is common to hear business owners swear never to sell on credit and many have given testimonies explaining how credit sales have forced many of their peers out of business. But on the other hand, we have also witnessed many businesses that have enjoyed impressive growth due to the provision credit sales to their clients. Many examples ranging from the telecommunications industry to most distributors supplying supermarkets and even schools here in Uganda have had many success stories when it comes to credit.
So why can’t you make it?
To get answers to this, it is important that you know the answers to these questions below before you decide to proceed.
- How will you know if a customer is a credit~worthy or not?
- How can you tell if extending credit will actually increase your profitability or not?
- What is the additional cost to the business when you sell on credit?
There are three major costs which are involved in granting credit;
- The major gamble is that the customer might not pay. Whereas most clients may pay, the ones that default may be bad enough to sink your business.
- And secondly, credit costs you money. When you offer credit, you’re selling an item you’ve already paid for on the premise that you’ll be paid by the buyer tomorrow. The money to pay for the product comes from operating capital that you may not have. Your customer is, in effect, using your product on loan while your operating costs and the cash needs continue to mount.
- Credit also costs you time. For most small-business owners, time is a precious and finite commodity. When you add credit decisions to your workload, you spend time making those choices instead of spending time running other aspects of your business.
- The other major disadvantages of offering credit are the potential losses when takes a long time to pay and the additional expense of follow-up and costs of collection agencies and lawyers among others.
Balancing the potential benefits with the risks of reduced cash flow and potential loses is an important part of managing risk in your business. It is therefore highlight advisable that before you offer credit, you are convinced of the following;
- That your customer has every intention of paying;
- That your customer is able to pay;
- That nothing will happen to prevent payment;
- That your judgment about the character and integrity of your customer is accurate.
The customer’s payment and general business history gives you an initial indication of your customer’s willingness and ability to pay. Your judgment on how accurately you made your decision to offer credit can only be dealt with by calling on your experience in business, your knowledge of human behaviour, and what you know about your customers.
The process to offer credit surely varies from business to business, industry to industry and even from customer to customer. It is therefore important that you develop a strict credit policy which offers guidance on how to evaluate different clients for credit, conducting the much needed due diligence, follow-up on credit cases and how to deal with defaults.
By Brian Ahabwe Kakuru
Brian is the Managing Director at BLEGSCOPE®, and has over 9 years of management consultancy experience notably in the finance and banking industry, MSMEs, FMCG companies and in the service industry. He has a BA (Econ). You can follow him on twitter: @BrianAhabweK