The role of credit in retail and service businesses has become an all-encompassing issue in recent years. Big-ticket purchases – which can mean an item as valuable as a car or even a house, or something comparatively small like a TV or games console – have come within the reach of people who could not simply drop the entire value of the purchase in one go. Credit has helped businesses to make more sales and realize higher value, so there are benefits for buyer and seller. At the same time, it is not without its challenges.
If you plan to make your business attractive to as wide a range of customers as possible, then you will need to consider whether offering credit is something you can and should do. This is not as simple a matter as looking at whether it is going to increase your sales, and below we will look at the competing priorities and offer some advice on whether offering credit is the right step for you.
Ensure that you are legally entitled to offer credit
Depending on where your business is situated, you may need a license in order to offer credit to customers. You’ll need to ascertain whether this is the case for you, and if so, which requirements you need to satisfy in order to qualify for a license. Make this your first priority before even planning to offer a credit service.
Protect yourself from the complications of credit
Sometimes, customers do not honor credit agreements. This can be because they don’t want to pay, because they forget to pay, because they cannot pay at the moment, or for a number of other reasons. You need, as a minimum, to be running credit checks; if a customer has a poor history with credit agreements, they represent a risk to you. If you’re offering credit to your customers, you’re probably taking it from your suppliers – so make sure you’re protected in case of non-payment. Trade credit insurance will offer you the chance to keep paying your suppliers even if customers aren’t paying you.
Explore your options for collecting
Every business that offers credit will have some customers who default on agreements. It is essential to retain contact with these customers – calling them within a few days of a missed payment to collect the default amount. Some customers will be tough to reach, and it is beneficial to have access to batch skip tracing so that you can get hold of evasive customers. You should also consider whether it is necessary or wise to add late payment fees for customers who default. It can help you make up shortfalls, but on the other hand it can hamstring customers who are on a tight budget.
Incentivize good customer behavior
It is nearly impossible to compete with businesses in your field who offer credit, if you don’t. At the same time, you need to ensure that you are being fair to your business and to the customers who pay faithfully. Offering discounts for early payment – such as taking off 5% if they pay within a week of their statement date rather than waiting for the due date itself – means that you will get more money earlier, easing the cashflow in your business. And it creates customer satisfaction in, and loyalty from, people you can trust to pay.