In this largely growing world with better opportunities to target and acquire customers, a large question bugs the budding and established businessmen alike – “Should I work with customers who ask for credits?”
Well, the answer to this question may not be straight, however, as a rule of thumb for businessmen, cash beats credit. Let us take you through the top reasons why asking for compensation upfront is a better idea than letting your customers stack up dues.
Customers Want Credit – But Probably Will Not Write it Up
It is a common tendency among all humans on Earth – to try to keep liability as far away as possible. One thing to be noted with care is that in cases where credit becomes stretched or extends too long, or the amount owed becomes too high, people tend to bail when payment is not possible right away. You stand the risk of losing not just the money you’re owed, but also the customer. Unless you trust your customer completely, extending credit may not be a very good idea. While extending credit, if you must, due diligence and paperwork might help you save time and frustration should a bitter situation arise.
No Credit-Giving Helps Avoid Bad Taste
It is true that once you ask a credit taker for your money, they are going to keep a distance going forward. Also, giving your customers the power to purchase more without having to pay for it upfront may backfire as a bad debt. Coming up with firm credit policy and then sticking to it should help you protect your coveted business from running into losses.
Credit Hampers Your Cash Flow
Speaking of losses, every business finds itself in jeopardy when funds are running low. Extending credit to customers for periods even as short as 4 weeks is still enough to show a red spot in your balance sheet. A thriving business depends largely upon a smooth flow of money, where all dues are cleared by the end of your cycle.
How to Change From Credit-based Structure to Cash Based One
The natural question that comes to the mind is then, “How do I make the switch? I have many dues already.” The answer is straight-forward. Creating a credit policy and letting your customers know is an easy-to-do passive methodology to ensure your customers know you mean business and are serious about it. This creates an environment where customers may do business with you on credit, but would also be liable to pay up on time. Also, having to do paperwork would deter a customer from asking for credits and it is more likely they would eventually start making payments upfront.
Also, limiting the amount of credit a customer can stack up will help you curb the dents in your financial plans. Keeping the limit to what you can handle for a month should be okay. This way, the moment your customer stacks up enough dues, you can ask them for payments. Once again, a written credit policy can come to the rescue.
Slowly filtering out customers who keep asking for credit without making regular payments is the next step businessmen can take once they have set up a structured credit extension system. Once you stop working with people who ask for too much credit, your red marks will automatically diminish giving you better numbers and ensuring the business will continue smoothly.
Once these steps are followed, a business is left with only those select few patrons who are trustworthy and to whom limited credit can be extended without fears of losing money. Ideally, putting 1-2% of your billables in credits can also help your business gain hold in the market and retain the best customers.
For more reasons in favor of cash than credit, it can be said that a business which deals in upfront payments has better chances of growth and survival than the ones which let customers ‘borrow’ frequently. Also, with the advent of new technology, it has become easier for even buyers to make payments right away, courtesy of multiple payment options. Removing bad debts and moving towards a cash-based structure can be safely called out to be a way to keep moving with minimal hurdles.