Let’s face it: we live in a credit society. Everywhere we go, we pay with credit, get offers for credit, and wish we had more of it. But it doesn’t stop with us personally. Credit is a big issue that businesses face as well, and on a regular basis. Customers want it, and there's a good chance that you don’t even know where to begin, or if you should.
First, let’s start with the basics. Credit is a sales tool. It’s true enough that you don’t need to offer credit. There is no law that requires it and nobody is going to force you to offer it to anyone. Quite simply, credit is a method of getting a competitive advantage over your competition. It’s just one more way for you to attract more customers.
From a cash flow stand point, cash on delivery (COD) or pre-pay (where the customer pays you prior to you delivering your product or rendering your service) is almost always the better way to go. There is no arguing with that. You can argue when your year-end comes, and you are doing all your last minute tax planning stuff, that you may not want cash right away. But generally speaking, cash on the barrel head is best.
When it comes to customers, it's a different story. They want to delay paying if they can, since that will help their cash flow. This is exactly why you can use credit to attract customers. But it is important to do it the right way so that it doesn’t become a burden that leads to losses or you chasing down delinquent accounts.
Keep these three simple rules in mind when it comes to offering credit to your customers. Now mind you, these three rules aren’t something I simply picked out of the thin air. These are the methods that credit card companies use to extend credit to millions of customers every year.
1. Start small
Offer the credit in a small amount at first. Starting out with around $500 to $1,000 (or whatever is appropriate for your industry), is ideal. It would be a mistake to offer a big credit line right from the beginning, as you might get taken advantage of. What you want to do is build a credit history with the customer and avoid taking on a huge risk from the get-go.
2. Reward them
After you have been doing business with them successfully, slightly increase their credit line. Be sure to tell them about it once you do. After more successful time together, do it again. Every time you increase their credit line, you create a “feel good” moment for them, encouraging them to do more business.
Always enforce your extension of credit, just like a credit card company would do. If a client fails to comply with the credit terms they accepted from you, you will need to take action. Start by applying the penalty in fees or interest, and if you need to, use a collection agency.
Another important factor to keep in mind when it comes to extending credit is maintaining a consistent credit policy. Write up your policy, provide it for customers to review, and have them sign it, stating that they have read and agree to the terms.
Offering your customers credit is an act of trust. Your customers will appreciate the trust that you are extending to them and in most cases, they won't abuse it. You may just find that offering credit will put you head and shoulders above the competition!