Anne-Marie Saint-John, Alva, Long Island City, NY >
Should you extend trade credit?
For those who don’t completely understand what trade credit entails, it can seem risky. Extending trade credit essentially means allowing your small business to function as a bank. Instead of asking your customers to pay with credit cards and thereby managing cash flow, you give them additional time to pay (usually 30 days). These payment conditions, by being prolonged in time, manage credit risk in the same way that a credit card company does.
It is a risky choice that requires careful analysis, but more and more small businesses are beginning to extend trade credit. In fact, the decision to extend trade credit is exactly what keeps many small businesses afloat.
These are the main reasons why your business should extend trade credit:
#1 – Beat the Competition.
Not all businesses in a given industry are capable of expanding credit trading. In this case, offering trade credit will give you an advantage over your competitors. Given the choice, clients will almost always opt for the business that has flexible payment terms over the business that does not.
In some industries, such as construction, trade credit is a standard item. In these cases, companies extend trade credit in order to keep up with the competition.
#2 – Increase sales.
Extending trade credit can increase the volume of your sales. Having more time to pay increases the buying power of customers and the number of products they buy.
#3 – Customer satisfaction.
Giving your customers more time to pay lets them know that you trust them, and this can certainly improve customer loyalty. Expanding trade credit shows customers that your business is financially stable. On the other hand, it’s just a nice way to say thank you for your business.
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However, there are also cases in which your small business should not extend trade credit:
#1 – Financial instability.
To extend trade credit effectively and successfully, your business must have financial stability. Trade credit is rarely an option for businesses going through financial uncertainties. In fact, applying for small business financing or even looking for suppliers also requires an impressive financial reputation.
#2 – Bad credit.
If your business can’t afford credit exposure, don’t extend trade credit. There are always other options, such as cash in advance for all customers. You can also extend trade credit only to your most loyal, trustworthy customers.
#3 – There is no need.
Assess whether or not you have a real need to extend trade credit. If trade credit is not normally extended by businesses in your industry, you may not need to extend trade credit at this time. Financial stability is more important.
