Protecting Your Business While Extending Credit to Your Customers
Many small businesses are acting as a banker to their customers without even realizing it. How does this happen? When you deliver a service or good to a customer, and then allow the customer to pay you at a later date. The amount the customer owes you is entered into the Accounts Receivable balance, and voilà, you've become a banker.
Of course, there are benefits to doing this. Your customers will buy more (or buy at all), knowing you offer terms on which they can pay (instead of having to write a check immediately). Second, you earn customer loyalty by showing that you trust a customer to pay you later for the goods or services you've already delivered. This helps to build a relationship over time.
However, maintaining Accounts Receivable also comes with some business risks, the biggest of which is the risk that the customer will never pay at all. Are you striking a good balance between sales and risk? Here's how to think about these questions when developing a credit policy for your business.