Companies that want to grow revenues can do so by offering credit to customers.
The credit line is over and above conventional bank financing or the customer’s cash on hand. Offering credit allows customers to purchase goods or services from you when they may not have been able to do so otherwise. The trade-off is that you have elected to delay your cash flow based on your clients’ promise of payment at a later date.
Offering Credit to Customers Can Have the Reverse Effect
Agreeing to give a new or existing customer time to pay should not be taken lightly. Business owners want to generate sales, but also want to help their clients. Sometimes however, the emotional desire to help by offering credit to customers overrides good judgment, creating an avoidable problem.
Credit management decisions must be made using as much objective data as possible. Before offering credit to customers, professional credit managers often refer to the 4 C’s of credit:
- Credit-Worthiness – Your credit-worthiness is based on how you’ve handled credit and debt obligations up to this point.
- Character – Assessed from your work experience, credit history, credentials, references, reputation, and interaction with lenders.
- Conditions/ Collateral – Based on the current state of the economy, on your business, and if you have assets that can be used to guarantee or secure a loan.
- Cash flow/ Capacity – Your ability to repay the loan based on available cash flow.