Issuing credit to customers can be good for business for a variety of reasons, but before you decide to do so, there are some considerations to keep in mind.

Why You Should Issue Credit to Customers

When you issue credit to customers, you have a good chance of increasing your sales. People often buy more when they don't have to pay for it all at the time of purchase. The more credit they have, the more comfortable they may feel spending more with your business.

A line of credit can also keep them coming back, because credit is also great for building loyalty with your customers. If they have credit with your company, but not your competitors', yours is probably the first place they'll turn when they're ready to make another purchase. For this reason, credit can give you a competitive edge.

Potential Drawbacks of Issuing Credit to Customers

On the flipside, there are some potential drawbacks to consider. For example, you'll have to wait until you receive full payment for goods or services rendered. This can impact your cash flow and create issues if you aren't prepared to make up for the cash flow in other ways.

You also risk not getting paid at all. Good customers will pay their bills (and do so on time), but you run the possibility of issuing credit that isn't paid back. This can not only create cash flow issues, but also impact revenue and profit. It can also bring collections-related hassles. This can eat up time and other resources and further impact your operations.

Develop a Credit Policy

If you plan to issue credit to customers, be sure to develop a credit policy. This should clearly explain how your business issues credit and how it handles collection of debt. This will help you make qualification decisions, define terms, set credit limits, etc.

"Without a credit policy, operating your company on an invoice-based billing model is inherently risky," says Max Freedman at Business News Daily.1 "That’s because companies without credit policies have fewer contractual ways to bind clients to timely payments, and fewer payments mean reduced cash flow. With less cash flow comes more challenges in paying bills and keeping operations profitable. More pointedly, credit policies keep clients accountable to you if you work in an industry known for slow or partial client payments. These policies leave little room for clients to argue against repaying their debts if you do ultimately send them to collections or file a lawsuit. The mere institution of a credit policy at your company can make it clear to clients that you won’t let your work go unpaid.”

Do Credit Checks

Before issuing credit, perform credit checks on customers who apply. This will help you determine if they qualify, based on your predetermined policy, by giving you a window into their financial history. It can help you determine if they are likely to responsibly pay their debt back and if they have the means to do so. If you run a B2B company, you can perform a business credit check.

Keep Cash Flow Under Control

When you start issuing credit to customers, you'll need to be careful about monitoring cash flow and keeping it under control. Keep this in mind as you determine credit limits. Use solutions to help you forecast cash flow. Stay on top of late payments, and stay on good terms with your own lenders. You may need a loan or a line of credit to use as a backup in case of late payments or non-payments.

Consider Rewards

It can be a good idea to reward those customers who are responsible with their credit and always make their payments on time or pay their balances off early.

"Clients who pay their invoices on time are the kinds of customers with whom you want to keep doing business," says Dun & Bradstreet.2 "Suppliers often provide discounts to those who repay their debts early, which can encourage even larger purchases. In addition, consider submitting payment experiences (records of past payment experiences) to business credit bureaus on behalf of your customers. This may help a company you work with establish or impact its  business credit scores and ratings."

Issuing credit to customers is not without its risks, but there are clear benefits as you increase sales and loyalty and build lasting customer relationships.




The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank. Nevada State Bank is a division of Zions Bancorporation, N.A. Member FDIC