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Tips to Keep in Mind When Extending Credit to Customers

extending credit to customers

Unless your product or service is entirely unique in the marketplace, like the majority of businesses , you will need to extend credit to your customers in order to remain competitive. The downside of extending credit to customers, however, is that it can cost you much more the higher your turnover and the longer your payment terms are.

(See table below for an idea of how much it can cost you if your business has an overdraft facility).

No. days from invoice date £250k £500k £1m £2m £5m
15 £565 £1,130 £2,260 £4,521 £11,301
30 £1,130 £2,260 £4,521 £9,041 £22,603
45 £1,695 £3,390 £6,781 £13,561 £33,904
60 £2,260 £4,521 £9,041 £18,082 £45,205

Interest Rate 5.5%

Either way extending credit can cost money, the table above also doesn’t take into account other overheads such as paying staff to chase for payment from your customers.

However there are things you can put in place to reduce the risk of this costing you more money than necessary:

  • Ensure full due diligence is carried out before any terms are agreed upon – once you have credit checked your customer you may want to reconsider how long or short their credit terms should be.
  • Don’t give all customers the same credit terms or limit; some customers will be higher risk than others so should have a lower credit limit and shorter payment terms to reduce risk
  • Ensure the risk to your business is kept to a minimum by determining credit terms and limits appropriate to the risk that a customer poses to your business.
  • Have your customers fill out a credit application form that can include trade references, full legal entity, address, registration number etc. For sole traders or partnerships, do you have full names and home addresses?
  • Ensure your credit control collections procedures are fully understood and adhered to by all members of staff; this includes front end staff, such as sales and account managers as well as finance.
  • Chase promptly when your invoices fall due; this should, over time, educate your customer to pay you on time.
  • Ensure credit limits are adhered to; you gave your customer a particular limit for a reason, if they seem to be surpassing this, ensure you prompt them for payment before any further credit is provided. Just make sure you have this covered in your terms and conditions.

Our support service can provide your business with a number of things, including advice on extending credit to customers, for a small monthly cost. Take a look at how it could benefit your business.