Growing your business through credit
Today, building your business means extending credit.

Many SMEs have shied away from the provision of credit concerned that it can result in all sorts of problems for business cash flow. This is absolutely true - extending credit can be a disaster if it is provided to customers that don't have the capacity or willingness to pay on time. It can also be a disaster if SMEs don't take the time to plan and prepare for the impacts that credit terms will have on their business. 

That said if done properly, granting credit to your customers can provide a major boost to your profitability.

So what are the things that SMEs need to look out for?

Managing credit in your small business hinges around information, communication and cash flow. Let's begin with information.                            

"Extending credit - to the right people, under the right circumstances - can be a boon to your business. The key is knowing when and to whom."

To make smart business decisions you must have quality information. The more you know about your potential customers before you extend credit, the better your chances of getting prompt and full payment. To achieve the required level of customer understanding, smart operators utilise simple credit checking processes.

A credit check must occur regardless of the size of the business as size cannot be assumed to correlate with payment behaviour. As part of this process, businesses must be prepared to turn customers away. The loss of a sale is more manageable than a persistently delinquent payer that impacts cash flow and spreads resources thin as the business seeks to recoup outstanding monies.

Next let's consider communication. Clear communications and a good flow of information and documentation will contribute to a good business relationship with your customers and follow-up will be a key aspect in managing your collections and cash flow.

This brings us to the third factor - cash flow. We all know that cash flow is the lifeblood of business and that a lack of funds is a key contributor in the vast majority of business failures. So how can you ensure that your business maintains a healthy cash flow once you have made the decision to extend credit?

The first thing to do is to build additional cash reserves - this must be done before you extend credit to your first customer. When you extend credit you will slow down your cash cycle. This will be a temporary situation until monies begin to flow in the door however you must anticipate and prepare for the reduced cash flow that will stem from your credit extension program.

The second tip for managing cash flow is to properly control the credit that you extend. This means you need to ensure that debts owed are paid in a timely manner. Late payment or non-payment of debts wreaks havoc with cash flow, not to mention the high labour costs associated with collection efforts.

By going through this planning process before providing credit to your customers SMEs can achieve significant positive benefits, including:

  • Increased sales: the ability to access products and services on credit often encourages existing customers to buy more
  • Improved profitability: higher sales = a healthier bottom line
  • New customers: Individuals or businesses who didn't purchase from you before may be enticed to try (and become a loyal customer) your products or services when credit is offered
  • Increased market share: If your credit policy offers more attractive terms for customers, they may be persuaded to buy from you rather than your competition, enhancing your market position.

Many SMEs have fallen over because they didn't put the right systems and processes in place. However many more have achieved outstanding success via the granting of credit simply because they took the time to plan effectively. In today's fast-paced business world extending credit to customers is increasingly becoming the norm therefore it is important for SMEs to ensure they plan correctly so that they stay in business and ahead of the pack.

Learn more about extending credit here >>


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