What is the cost of offering credit to customers for your business?
The best way of avoiding credit control issues in your business is to ensure that you are paid in full before providing any goods or services. However, unless you have a unique product or service that is in high demand, or in an industry where it is custom and practice to expect payment in advance, you may find you put you at significant disadvantage from competitors. The majority of B2B businesses offer credit terms to their customers.
Offering credit to customers does have cost implications to a business and you should be mindful of what those costs are.
Additional administration costs
In offering credit, you will require additional administration; particularly in the case of overdue accounts, you will need effective credit control staff to chase for payment in order to reduce the financial burden to your business. Costs may include:
- Stationary & other expense
- Overheads such as heat & rent
- Salaries for your credit control staff
- Set up costs
- Collection costs (i.e. legal fees)
Loss of opportunity- Cash tied up with debtors
If you are offering credit to your customers, then a significant portion of your cash flow will be tied up in your debtors. This may impact the funding required for any growth plans
Financing your customers
By offering credit you are essentially offering your customers an interest loan. In doing so you may be operating an overdraft facility and paying interest (please see example table below). In order to keep these costs at a minimum, it is essential to ensure you have strict credit management procedures in place.
Late Payments
Late payments amongst UK businesses is a huge issue and one that is not likely to go away any time soon; as a result of late payments cash flow for businesses are put at risk, resulting in businesses needing to increase their own borrowing.
Bad debt
There will always be a risk when offering credit of having a bad debt. A bad debt is defined as a debt that is unrecoverable and therefore written off, your business may receive one for a number of reasons, including:
- Customer insolvency
- Disputed invoices in which it would not be commercially viable to pursue a debt through legal action
Businesses offering credit must be prepared for the costs that go along with it, however by having effective credit management procedures in place you can ensure that this cost is kept to a minimum, ask us how we could help you to do this.
