The Benefits of Setting Customer Credit Limits
For many businesses, particularly those in B2B businesses, offering credit to customers is a necessity in order to remain competitive. Considering this, every business needs to have procedures in place that determines what payment terms a customer will receive, and how much credit they will be given.
What are the benefits of setting customer credit limits?:
Leverage
Credit limits can be used as leverage, to encourage customers to make higher value and quicker payments in order to remain under their limit. This will only work effectively, however, if credit limits are adhered to. If customers are allowed move over their credit limit without payment then not only is the task of setting credit limits a pointless exercise, but customers will be of the understanding that they can continue to use a service without making timely payments.
Credit hold
By using credit limits companies can also implement a credit hold policy for late, non-payment or for customers that have exceeded their credit limit without bringing the balance down. As above, warning customers that work will cease until their outstanding balance is lowered or clearer entirely, is an effective form of leverage. Be aware, however, that the ability to place customers on credit hold needs to be stated within your terms and conditions, if not your customers could claim breach of contract.
Reduced risk
Put simply, limiting the amount of credit offered to customers will limit the amount of bad debt a company is exposed to, should a customer fail to pay. To reduce risk even further, companies must have strict collection strategy procedures in place to chase for payment of invoices, as well as monitoring and enforcing credit limits.
Reduced costs
There is a cost to offering credit to customers, therefore it goes without saying that tying in customer credit limits with strict collection strategies will keep costs lower than if customers gain more and more credit without paying on time.
Within our outsourced collections service, we monitor and implement credit limits alongside collection strategies so that our clients receive payments from their customers quickly and on time, as well as lowering their risk to bad debt. Take a look at how our service has helped businesses.
