Every business owner would love to sell products and services on a cash basis. But in a competitive market, that is impossible. At times, sellers have to offer their products and services on credit terms to incentivize customers to buy from them. Unfortunately, this can open the business to a lack of cash flow. Take a look at some of the advantages that come with trade credit.
Here are the benefits.
A customer is likely to buy more goods from a seller on credit terms than paying cash immediately. However, sellers should also have payment terms in place, like the period a buyer has before making the payment.
Extending credit to buyers shows that you trust them to make payments. This is one of the ways to build customer loyalty and ensure they continue buying from you.
A seller offering buyers trade credit has an advantage over other sellers not offering the same service. Naturally, buyers will prefer dealing will sellers that allow them to get goods on credit terms.
Incentives for Customers to Pay
Even though you may offer your customers two weeks or 30 days of credit, encourage them to pay earlier by offering a discount. Waiting for 30 days can be costly for some businesses.
Take a look at some of the disadvantages of trade credit.
Affects Cash Flow
The biggest drawback is that the business cash flow will be affected because a seller does not get immediate cash. This can also affect the business budget down the line.
Sellers Have to Investigate the Creditworthiness of Customers
Just like lenders, a seller has to investigate customers to be sure they are creditworthy. This can cost money and time.
Monitoring Accounts Receivable
Selling goods on credit means you have more accounts receivable to deal with. You will also need to monitor your accounts receivable and keep reminding clients to pay in time.
Possibility of Bad Debts
There is the possibility that some buyers will not pay their debts on time. When this happens, you or one of your employees will spend time calling late payers. Eventually, you may write off the debt and go on a loss.
The problem with trade credit is that if it affects your cash flow, you may not be able to pay for the business’s expenses. If you have run into this challenge, contact Critical Capital Solutions. We can help you access the funding you need to ensure your cash flow is not affected.