Credit is extended for various reasons. The main reason to do so is that businesses do not want to be broke and have no money. Some reasons are personal or business-related, or they may just be a convenient thing where they can take on credit without having a lot of time or resources available. However, it is wise to keep the assistance of a Clearwater commercial litigation attorney if you are extending credit.
Below is an overview of the pros and cons that extending credit entails.
Pros of extending credits
Increases customer loyalty
Extending credits, when available, increases customer loyalty and improves the long-term relationship with those clients. It also boosts the customers’ perception of the business, thereby increasing its market share.
Increases business reputation
When businesses extend credit, especially for larger purchases or for customers with weak credit, the business gets access to a whole new customer base. Some would argue that it opens up the market to low-end and undesirable clients, but it is actually a much better deal than letting such clients use cash only. That’s because instead of getting paid in cash, they get interested in what they borrow.
Increases order size
Even though some believe it reduces sales because people are afraid to borrow money and owe payments later, most data shows that extending credit actually increases order size and makes larger purchases possible. This can lead to higher production volume and increase money received during one transaction.
Cons of extending credits
Even though most businesses offer a 10-30 day grace period for payments to be made, some clients simply don’t pay. It is one of the biggest risks that an organization takes on when extending credit. There are late fees involved, and if the client has a history of not paying, it can lead to a loss of reputation and long-term relationship.
Adverse effects on cash flow
The cash flow that comes from extending credit is usually reduced. The money that is borrowed from the client will typically be used to pay down other debts or expenses that may or may not accompany the product. It can reduce business profits, especially if the client does not keep up with payments.
Have to pay collection fees
If a business extends credit, some collection fees will have to be paid if the client fails to fulfill their obligations. If the business owns or rents warehouses and other storage facilities, they will most likely charge additional fees when there are late payments or non-payments.
Additionally, if late payments continue, it can lead to penalties on your company’s credit score. Lenders can refuse loan requests, and loans may have higher interest rates attached to them.