For years, some critics, advisors and industries have argued that granting credit is harmful - both for liquidity and as an unnecessary risk factor.
Theoretically, there may be something to it; credit that is not granted under the right terms and conditions can cause cash flow challenges and bad debt issues.
However, if credit is granted under the right framework and with a solid credit policy, the benefits can be so great that they happily outweigh the potential risks associated with granting credit.
Here we take a closer look at how a well thought-out credit policy not only reduces risk - but can also give you a real competitive advantage.
From cashflow loss to customer gain: The benefits of extending credit
A credit is any form of deferred payment - for a shorter or longer period of time.
Credit comes in many forms, but classic credit can be, for example, a craftsman who buys building materials for a job and only has to pay for them after, say, 30 days.
Credit can and should be given for many different reasons - but the overriding reason should be to provide a good service to your customers. This can give you a clear competitive advantage, especially if your competitors don't offer credit.
Extending credit means that payment for your goods is delayed - and that, of course, affects your cash flow. You're purchasing goods that you won't get paid for until later than if you didn't extend credit.
This obviously affects your cash flow, but should be seen as an investment in increased revenue and customer acquisition.
Your customers think strategically - and often choose the supplier that gives them the best cash flow. If it's not you, it's a competitor.
In practice, this means that the craftsman can purchase materials for a project, consume them, invoice his customer and receive payment - before he has to pay his supplier, you. This gives the craftsman optimal liquidity conditions, as he doesn't have to spend any money.
When credit is the norm, not the exception
Not all industries provide credit - and as a private individual, you rarely get credit in stores when you shop on a daily basis.
However, the situation is different in the B2B world. Here, credit is much more widespread - especially in certain industries.
For example, credits are often used in the construction and catering industries.
If you have customers in industries where credit is common, you'll find that demand is also higher - some customers will even expect or demand credit.
Without a credit policy, you lose track - and money
The credit policy determines when and how your company provides credit. The credit policy can contain a number of essential elements - but most importantly: who can get credit, how much can be granted and under what conditions.
Fortunately, many companies already have a good credit policy in place - but unfortunately there are also many that do not have an adequate or updated credit policy.
No, poor or inadequate credit policies often mean that employees - such as salespeople - lack clear guidelines on credit:
- Who can get credit,
- how much credit can be granted and
- Under what conditions.
Without a clear credit policy, you risk giving credit to the wrong people - and turning away good customers who could carry a higher credit limit. This can have serious consequences for your business, such as losses and bad debtors.
Strengthen your credit policy with data - and get a head start
Granting credit is a discipline in itself - but with a good credit policy, you create the best conditions for both your business and your customers.
An effective credit policy must be continuously updated and reflect the company's strategy: Who should get credit - and on what terms?
A good idea is to supplement your credit policy with a tool like Qatchr.
Qatchr supports your credit policy with data about your customers' finances - such as financial statements and key figures.
Qatchr gives your business direct credit recommendations on both businesses and individuals. These recommendations give you an indication of how much credit you should extend.
In a nutshell: Qatchr gives you better decision-making and more control over your credit policy.
