Credit terms can significantly affect the cash flow of businesses. Hence, it is a must for both big and small businesses to have established credit terms. One of the most common dilemmas concerning credit terms is whether they should be extended. Here are some benefits and drawbacks of extending credit to clients:
Pros:
More loyal clients- A business that extends credit gives clients the impression that the company trusts them. Also, clients will most likely appreciate the convenience that extended credit offers because it helps them to be flexible with their finances.
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Competitive advantage- Other businesses in the market may not be offering extended credit to clients, so companies that do otherwise gain an edge over those competitors.
Increase in sales- Studies show that most customers tend to be more willing to pay more with the knowledge that they can pay later. This results in businesses gaining more clients and gaining sales, assuming that they pay.
Cons:
Unreliable clients- Extending credit may gain loyal clients, but it can gain unreliable ones as well. Businesses will often come across clients who pay extremely late or those who do not pay at all.
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Cash flow problems- Strict credit policy results to steady cash flow while extended credit terms may disrupt the resilience of cash flow because of unreliable clients.
Insufficient income- Cash flow problems, if not handled efficiently, will most likely result in insufficient revenue. This may force the business to borrow money to sustain operations.
Brennan and Clark has been providing businesses with quality debt recovery services since 1980. For updates about credit collection, follow this Twitter account.
