As a business owner, you can expand your customer base and increase your sales by extending credit. Particularly if you are catering to other companies, your customers may make large purchases that require financing.
Unfortunately, extending credit is not without its risks, and many business owners make common errors that jeopardize the future of their company. Avoid these mistakes when extending credit to your customers.
Failing to consider cash flow
As reported by Business Insider, approximately 80% of small businesses that fail do so because of cash flow problems. It is important to carefully manage your cash flow when extending credit, as you do not receive funds at the time of a sale.
Treating friends and family differently
Perhaps you feel obligated to provide better terms to family members, or maybe you assume that you know someone well enough that you do not need to run a credit check first. When you treat your loved ones or acquaintances differently than other customers, you create significant financial risk for yourself and your business. Instead, set expectations with the people you know from the start and require that they go through the same process as anyone else seeking credit terms.
Letting debt become delinquent
Debt collection can be a complicated process, and too many business owners fail to pursue uncollected amounts because of this. However, the longer you wait, the harder it is to collect on delinquent debt. After a certain amount of time, you may no longer be able to collect it at all.
Though extending credit can complicate your company’s finances, it is an important tool for growth. Careful consideration and active management of delinquent debt can help to reduce the risks.