In the normal course of business, many companies offer their customers the option to “buy now and pay later.” This process, known as trade credit -- or vendor credit, or buying on credit terms -- is when a business allows its customers to pay for goods and services at a pre-approved later date.
As a seller, you may be asking yourself why you might consider offering credit to your customers. Do the risks outweigh the rewards? Below we’ve outlined the advantages and disadvantages to offering trade credit.
- Win New Customers. By offering trade credit to customers, you’re sweetening the terms you give to them and showing you can be flexible. While you might not be the lowest-priced supplier, offering credit may give you just the competitive edge and be just the incentive to push them to buy from you.
- Customer Loyalty. Offering credit terms to your customers is one of the best ways to keep your customers loyal and coming back for more of your goods and services. Trade credit opens the lines of communication and shows trust between both parties. In some cases, offering credit to your customers spells the difference between them being in business or not.
- Sell more Goods and Make More Money. Loyal customers mean happy, returning and growing customers. And customers that are given a helping hand when it comes to cash flow are more likely to spend more money with you. In other words, you’re critical to helping them grow.
- Makes Financial Sense. Remember that you don’t just have to offer delayed payment terms to your customers. You can also offer them discounts for paying early. For example, you can offer them 2/10, Net 30, which means the customer can get a 2% discount if paid within 10 days, but the full amount is still due by 30 days. Offering your customers flexibility, can help you as well.
- Credit Checks and Customer Monitoring is Easy. While it hasn't always been easy to have a customer fill out a credit application, in the current age it only takes a few minutes. Previously there was a cumbersome process that could take weeks of mailing and faxing applications back and forth. Nectarine Credit offers a digital credit application management tool that helps you monitor customer creditworthiness.
- Risk of Late Payment or Non-Payment. While there is the risk you might not get paid, you can dramatically lower your risk, by having your customers fill out a digital credit application like we offer at Nectarine Credit. You can do a one-time check and monitor existing customers for ongoing credit risk.
- Tight Cash Flow. Offering credit terms might put you in a tighter financial situation with your own suppliers. You might have spent money on supplies but you haven’t collected the cash yet from the customers you’ve given credit to. The solution, of course, is to ask for credit terms from your suppliers. Essentially, as a seller you’re acting as a short-term financer to your buyers.
- Cost of Cash Discount. If you offer discounted terms to your suppliers, you reduce your profit in exchange for the early payment. Of course, the benefit is that your company’s cash flow is improved since you receive the cash payment sooner than you would have otherwise.
While there is a cost to offering trade credit, the advantages greatly outweigh the disadvantages. Automated digital credit management systems like Nectarine Credit offer an easy-to-use platform for suppliers to de-risk their credit approval process. Our platform is free to get started.