Nothing could beat the feeling of having the ability to buy an item and paying for it at a later date. This is why credit cards and online shopping sites’ pay later purchase schemes are extremely popular these days. Consumers almost always like the idea of making a purchase and not being required to pay for it outright. It is like extending credit to them. This is what trade credit is all about.
Your business could boost sales by offering trade credit. You would strategically allow your customers to pay for the products or services they bought from you at some time in the future. For sure, more customers would be further enticed if they learn that your business may not require upfront payment upon purchase or delivery.
Understand that granting trade credit is now an expected and widely used practice in most industries. But you should try to protect your company from possible bad debts and greater risks from providing the credit. If implemented effectively, the practice could serve as an important key that may lead to your business’ success. Otherwise, it could jeopardise not just your profitability but even your venture’s survival. Here are ways on how to implement it.
Put everything in writing.
Draft your credit policy in a way that you clearly specify your business’ credit evaluation criteria, the credit limit you set, and your proposed payment terms. The document should also state your penalties and the interest rates you would accrue especially on possible late payments. This policy would serve as a document that states your terms and conditions for extending the credit to customers.
Require credit references.
The written credit policy must include a formal credit application form that should be completed by your customers before they are allowed to obtain trade credit. Include a portion where your customers could enumerate/name his credit references, possibly their banks and some other creditors. Before providing the trade credit, be sure to contact those references for verification of information about the customer. Checking his credit record may also help.
Set limits and terms.
Your credit and reference checks should be used for setting appropriate credit limits as well as payment terms. Those limits and terms should differ from a customer to another. Thus, the trade credit you offer and provide to every customer should vary depending on his credit worthiness.
Strive for balance.
Don’t be too strict or too lenient. If you have stringent credit criteria, you may turn off good customers and possibly lose sales. On the other hand, if your criteria are too lenient, your business may end up piling bad debts and uncollected receivables. Set your goals in the middle ground to have a balance.
Determine your business cash flow requirements.
Lastly, set your credit policy in a way that it would meet your business’ monthly cash flow requirements. How much would your business need to be able to meet your daily operational expenses? How much cash would you need to cater to your working capital needs?
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