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The problems with offering credit to your customers (and the solutions)

22/10/2019 / Comments 0

The problems with offering credit to your customers

Offering credit terms to customers is now widely accepted as the norm. In some industries it is therefore pretty much an expectation. But, for many businesses, it can be problematic.

Here we consider the main issues with selling to your customers on credit terms and offer practical solutions to help you overcome them.

PROBLEM 1: It’s time-consuming

Ensuring that you are trading with creditworthy businesses and always get paid on time requires a significant amount of time and resource. From performing upfront checks to staying in contact with them – not to mention chasing them should they miss payment deadlines – credit control can be quite a drain on a business.

SOLUTION:

The most important step is to ensure that you have a thorough credit management strategy in place. This will help to streamline your process and make it as efficient as possible. If managing this process is taking up too much time or resource, it could be more cost-effective to explore outsourcing options.

Further reading: 7 credit management techniques that will save you time

PROBLEM 2: The risk

Knowing who you should and shouldn’t offer credit terms to can be difficult. New start businesses, for example, might not have adequate history to provide peace of mind for you to trade with, whereas even longstanding customers with an excellent track record of paying on time can experience cash flow difficulties at any time.

SOLUTION:

The first step is to make sure that you credit check each customer, old and new, to check the risk they pose. Then, using this information, you can decide how to proceed. Remember, just because you offer credit terms to one business doesn’t mean that you have to do it for everyone. Any businesses that are deemed to present a high risk can easily be excluded and only supplied to with a deposit or full upfront payment.

Further reading: How well do you know your customers?

PROBLEM 3: Protecting cash flow

Unfortunately having to wait for payment, even if customers do pay within terms, can impact your cash flow. There is also the potential issue of non-payment or late payment which can leave your business vulnerable.

SOLUTION:

Credit insurance can help to mitigate these risks of trading on credit terms by offering protection against late payments and bad debt. As well as this, funding options are available which reduce the cash flow impact of trading on credit terms. Invoice finance, for example, bridges the cash flow gap by releasing up to 90% of an invoice’s value within 24 hours of its issue. 

Further reading: How to protect your cash flow from bad debt

PROBLEM 4: Balancing customer relationships

When it comes to chasing payments, balancing customer relationships with a firm credit management stance can sometimes stretch relationships. It can be a fine line to tread, as you don’t want to damage the future relationship by employing hardline credit control tactics – but often they’re the only way to obtain payment.

SOLUTION:

Communication is the key to preserving any relationship. Talk to your customers and explain the importance of paying on time. If they are having issues listen to their needs and try to come to a mutual solution. Again, outsourcing collections may be a sound option for your business. A good debt collection agency will use a persistent but polite approach to encourage your customers to pay whilst preserving your relationships. 

Further reading: How to politely chase late paying customers

PROBLEM 5: Knowing when enough is enough

Persistently bad payers can end up costing your business more in management than their business is worth. But, when attracting customers is a challenge in itself, saying goodbye to one you have already won seems impossible.

SOLUTION:

Be strict and regularly review relationships to identify your ‘valuable’ customers and those costing you more in management than their business is worth. Whilst ending customer relationships is arguably a last resort, it’s important to remember that when a customer is coming between you and a healthy cash flow, they are arguably no longer worth the money they spend with you.

Further reading: Why not supplying bad customers makes perfect business sense

Find out more about Hilton-Baird Collection Services’ outsourced credit control service or get in touch to speak to one of our experts now.

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