Credit Extensions: Sometimes, The Customer is Worth It

Business owners have a strong, vested interest in making it easy for their customers to avail of their services and products. Many businesses accept credit cards to allow people to purchase items they would not otherwise be able to buy. Extended credit is another way to help improve customer relations and to show customers that the business is willing to cut them some slack.

The problem is that many businesses are so desperate to get an advantage over their competition that they are willing to extend credit to their customers just to have their business. Never mind that this is the equivalent of an unsecured loan – all the owners are thinking about is how their customer is shopping with them. There is nothing like a “friendly” business to keep people coming back.

Unfortunately, whether or not the economy is doing well, some people just end up not paying. At the end of the day, the business or the company is what takes the hit. Before a company decides to give its customers the benefit of the doubt and extend their credit, there are a few things to consider.

As with anything, there should be a policy or a system in place that pre-determines which customers are eligible for extended credit. This is the same policy that will determine just how much credit is available to those customers and how that credit will be monitored. This will assure the customers that any credit extension allowances or denials are not personal and are instead strictly a matter of business.

This policy should include a credit application wherein the customer lists trade references, credit authorization, and information on their banking history. It should also inform the customer of what to expect from their credit extension. It also helps to pull consumer credit reports on the customer to see if they are indeed trustworthy.

The worthy few should be treated as such. Smart companies will offer them every opportunity to pay off their credit. They should be allowed to pay using the method they are most comfortable with. If they are comfortable with payment by mail, then they should be able to pay that way. If they want to pay online, they should be able to do so.

In addition to the aforementioned credit policy, companies should generally only offer credit extensions to customers that come with a lot of business. Those who have history with the company should be considered for extensions more favourably, as a loyal customer is definitely more likely to pay his or her debt.

There are a few mistakes that companies make when they do end up offering extended credit. No matter how personal the relationship with the customer is, a company should never leave the terms of a credit extension to a handshake. It should be in writing and agreed upon by everyone involved.

Extended credit should not be offered to anyone at all if the company doesn’t have money flowing in from other sources. Doing so bets the future of the company on the debt, which is a position businesses should generally avoid. In general, it is good to make sure that any risks incurred by extending credit should be within the capabilities of the company.

It is also best to err on the side of caution and have a way of collecting money from customers with credit. This can make sure that the company stays protected should the worst occur.

Being paid outright is, of course, the best option. However, the bigger the purchase, the less likely it is for that to happen. Allowing select customers credit extensions can deepen customer loyalty and increase sales in a way that would not have occurred otherwise. While it is something that should be handled with great care, the benefits of allowing extended credit for select customers blow away any disadvantages that the company may incur.