5 Important Things Businesses Overlook When Extending Credit

Trade Financing Matters welcomes this Guest Post from Matt Osborn, Senior Marketing Manager at Apruve, a Fintech company that is revolutionizing how businesses buy from each other.


Extending credit to your customers is one of the best ways to boost sales, especially in a B2B environment. A majority of business operate with the assumption they'll pay over 30-120 days, which can make it difficult for them to pay cash in full at the point of sale.

But there are a lot of mistakes businesses can make when extending credit, B2B payments can get complicated. If you’re not careful, extending credit can harm your business instead of helping it.

Avoid letting your sales team become collections

Depending on your business model, you might have a sales team that sells your product to potential customers. Even if they are successful at closing deals, this doesn’t necessarily mean those customers will keep their end of the bargain and pay their monthly bills on time—or at all.

Once customer accounts fall into default, sales teams can end up spending more time chasing payments and becoming bill collectors rather than focusing on sales. Not only is this unfair for sales teams, it also takes them away from doing what they do best: closing deals. This ends up burning the business wick at both ends: Your sales team is too focused on chasing payments and as a result, they end up spending less time making sales.

After a short time, you will notice that you are burning through more cash than what you have coming in.

If you are struggling to get customers to pay, then it may be time to hire or outsource collections to an agency that specializes in collections. Not only is this more efficient, it's likely more cost effective. Collections agencies are armed with prime negotiation skills to help collect customer payments, and it will open up your sales team to close more sales.

Keep Your Cost of Capital In Mind

Almost every business requires some form of capital in order to purchase supplies, build up inventory, equipment and hire a staff. Landing a willing investor who hands over a lump sum of cash, or securing that business loan might make many business owners feel like they won the lottery. However, it’s important to keep in mind that borrowing that capital comes with a cost that you need keep in mind when considering extending credit.

A lot of business don’t factor this in when extending credit to their clients. Your capital has a cost, in one form or another, and you need to keep this mind when approving credit for your customers. There's obvious costs like interest, but there’s also opportunity costs. What could you be doing with that cash if you got it 1-3 months before you thought you would?

When you create your credit policies, keep all of this in mind. If extending credit is losing you money because of the time it takes to collect, it’s not worth much to your business. Understanding the cost of capital and the expenses that go along with it can put you in a much better financial position—and one that doesn’t lead to bankruptcy.

Remember The Expense of Payment Methods

In today’s digital age, many businesses rely on electronic payment methods to send invoices and collect payments. With PayPal and Apple Pay, and Square, for example, fewer and fewer businesses rely solely on receiving checks in the mail.

Convenient? You bet. Expensive? It can be. Electronic payment methods, such as PayPal, Apple Pay, Square credit cards and wire transfers are all incredibly convenient, but they also come with a cost. For example, PayPal charges a percentage of the payment amount, per transaction. Square charges $0.25 per transaction. Other methods may also involve hefty monthly fees in addition to what businesses must pay per transaction.

Just like your point of sale systems, if you're using a credit platform it can cost you money as well. Make sure you research whatever service and factor that into your credit policies. Checking credit reports is another fee to keep in mind.

The point is that your customer payment expenses can easily total into the thousands every month. Keeping these expenses in mind will not only prepare you for them, but it may also play a role in determining or adjusting your credit extension policies.

Cash Flow

One of the top reasons why more than half of all startup and small businesses fail within the first five years is due to a lack of sufficient cash flow.

If your business is struggling with cash flow, this can end up costing you over the long run. Many businesses that struggle with cash flow may try to acquire high cost loans, enter reverse factoring agreements, rely on their own credit cards and more. Not only that, it can damage your reputation and your business.

Don’t extend credit if you don’t have the cash flow to support it. Your cash is what is going to help you keep your end of the contract. If you don’t have the means to provide your product or service while extending credit, don’t extend credit. You will find yourself in a worse situation then when you started.

By ensuring a sufficient, healthy cash flow from the beginning, businesses avoid the costs of trying to keep up with monthly bills and expenses.

Credit and Fraud Risk

Like we mentioned above, you put yourself at some risk when extending credit. Whether it’s just your normal “late every month” customers, or something more sinister like someone giving you false information to get your product for free, you need to protect yourself when you extend credit.

Credit management services are great at helping prevent risk. Good ones will have access to credit reporting platforms, so they'll do the research for you. Once they've approved your customers purchase, a top-of-class credit management service will assume the risk of the debt, putting your mind at ease.

It’s important for businesses to have a solid understanding of all of the possible expenses they face when extending credit. By overlooking these financial areas, businesses may end up putting themselves in an unnecessary, difficult financial situation.

However, if done correctly, extending credit can boost sales and help you grow your business into the future.

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