A credit period is the time frame between when a customer purchases a product and when the customer’s payment is due. Credit period for your customer is a great tool that can be leveraged for your business growth.

1. Up-sell and cross-sell to existing customers: Credit period allows your customer to manage their finances better. It allows them to plan expansion, increase their order book and do more business with their existing partners. This gives you more opportunities up-sell and cross-sell to your existing customers driving your business growth.

2. Sell to new customers: Credit period allows customers to purchase items before they actually have funds, thus an attractive proposition as your sale term. It it increases your ability to reach out to new customers and builds the credibility of your company and product. Credit period gives the much needed confidence to a new buyer that you stand-by the quality of your product and hence are willing to delay receiving the payments.

3. Stay competitive: Unless you have a very niche product, it is likely that you are facing intense competition in sales. Pricing, sale terms, complimentary services are some common strategies to gain a competitive advantage. Credit period is valued by the customer and can be key the differentiation between you and your competitors. Credit period helps your customer preserve working capital and a flexibility to expand their business.

4. Contract with large companies: MNCs and other large companies, due to their size command the sale terms for their purchases. Requirement of credit period ranging from 30 days to 90 days is a given in any of these transactions. SMEs need to manage their finances and work on these terms to do business with these companies.

5. Start exporting: Credit period is virtually a norm for international businesses. It is common for companies to reject export orders because of their inability to extend credit to the customers. Understandably, the risks associated in dealing with unknown entity (for both buyer and sellers) need to be managed but exports can drive your growth multi-fold.

6. Strengthen customer loyalty: Customers are more likely to stick with you when they get favourable terms in the sales.

No rewards come without the element of risk. Sales with credit period also has risks associated with them and that is the reason why most companies are not willing to sell on credit. However, if managed well, these risks can be mitigated significantly without affecting the business.

(a) Manage bad debt and defaults: Key risk associated with extending credit is the risk of bad debts and defaults. If the buyer defaults on the payment, it not only affects the finances of the company but also significantly affects the morale of the entrepreneur. It is important that appropriate precautions are taken to prevent this risk -

• Do a proper due-diligence of the customers before entering into agreement with him. Tools such as Business Information Report help you understand the financial position of your customer and understand the paying capacity of your customer.
• Ensure that your credit management processes are in place to give early indications of any default by customers so that you can take appropriate measures to recover your payments.
• Hedge the risks by taking appropriate protection in the form of insurance and other financial products so that you can recover your cost in case of default by the customer.
  
  

(b) Incentivise early payments with trade discounts: While you may extend a credit period of 30 days, offer small discount (1% - 2%) for payments within 10 days. This will incentivise the customers who are willing to pay early, reducing your average collection period. By offering this discount you can save on the time and resources required in following up with your customer for the payments. Short average collection period is an indicator of good financial management practice.

(c) Use working capital and invoice discounting loans to manage your finances: Selling on credit affects your cash flow and working capital. It is important that it does not interfere with your ability to run your business. Working capital and Invoice discounting loans can help you manage this. These are available for short duration (3 – 6 months) at attractive rates. These can be priced in your product so that your trade margin does not suffer.

GlobalLinker has partnered with IRC Credit Management Services to help you manage your credit management processes. Speak to their experts to understand how you can grow your business through credit without taking undue risks.  

Interested in reading more articles on finance and accounting? Check out our other articles here:

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Why business credit is a must for business owners

6 limiting financial beliefs that prevent SMEs from achieving business success

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