The Pros And Cons of Extending Trade Credit Terms

Small business owners are often confused about whether or not they are supposed to extend trade credit terms to their customers. However, this is a decision which is best taken by the owners itself. They will know if they can trust their customers with such credit terms. Like any other business procedure, there are certain pros and cons of this facility that one must take into account. Every business, be it a furniture and fixtures firm or a leather manufacturing company, must have an idea about the following advantages and disadvantages of extending credit terms to their clients.

One of the biggest advantage is that you customers are likely to do more business with you and will spend more on you. When you extend trade credit terms to your customers they are likely to buy all those stuff that they require from you. And this, in turn, will boost you sales provided that you receive the payments on a regular basis. This is a facility that all your customers will appreciate as they can pay on credit. Thus, it will increase your loyalty and goodwill amongst the customers. However, make sure that the customers are reliable enough to enjoy such privileges. It is usually advisable to provide such offers only to those customers with whom you are doing business for a longer period. In addition, ensure that the customers have an apt financial condition.

In general, the costs of better quality products are higher. It has often been noticed that customers are ready to compromise on the quality of products when it comes to cost cutting, especially during bad economic times. However, if you offer extend trade credit terms to your existing customers you can conveniently shift their focus from the price to the quality of your products as well as on your flexibility. In addition, this facility will help you to earn a competitive advantage over your direct competitors. But for that you need to implement the policy before any of your competitors.

This was one side of the coin. As said earlier, this facility has some disadvantages like any other business policies. One of the biggest drawbacks of extending credit terms to your clients is that they may not pay you at all. Often clients come up with various excuses when ask for the payment and some may even deny to pay you stating that you have given poor quality products due to which they suffered heavy loss. And dealing with such situations include a number of legal procedures, provided you have all necessary papers.

As we have already mentioned that you need to verify the financial status of your customers in order to make an informed credit decision. This is usually a time taking procedure and you will also need human resource to conduct a research, which means you need to invest your own money so as to help your clients. Such research usually include studying the client's market condition, customer feedback and demand for their products, whether or not they have any existing loans and their reputation about previous similar financial deals etc.

Another factor that you must consider before extending credit terms is your own cash flow. Make sure that you have enough funds to continue with your business operations before you let your customers to use your money for any given period of time.