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Should you offer credit to consumers?

creditcard19160241.jpgA common marketing tactic to get customers to purchase more products is to offer consumers credit cards. Credit is a great way to help your customers pay for your products and it also provides you with the opportunity to earn more money because you can charge interest. Credit cards are also a wonderful way to keep your customers loyal to your company.

Unfortunately offering credit cards to your customers doesn't always mean you will get paid. There are a number of factors that cause customers to forego paying their credit card bill. Most of them have financial problems caused from a family emergency, hard economic times, or poor money management skills. Even the most-qualified applicants may run into problems at least once.

To reduce the amount of uncollected debt you have, you need to take steps to protect your business before you extend credit to someone. Here are some tips to follow:
- Do not extend credit to every customer that walks through your door. Offer it to the customers that regularly shop or to the customers that ask about the credit card.
- Always do credit checks on your customers before you offer them credit.
- Set your credit card limits lower; start out with $500 versus $2,000. This will help to control your customer's spending and it will prevent you from losing too much if a customer falls behind.
- Have enough money set aside in cash reserves to make up for the money extended in credit. Far too often business owners will depend on the credit cards to keep their cash flow moving properly and this can cause financial disaster for your business.

Businesses not only offer credit to their customers, they also offer it to their suppliers and other clients. Offering credit to your suppliers or clients is known as trade credit. Like credit cards, trade credit can also cause a financial burden on your cash flow if you depend upon it. Normally government entities and larger companies will ask for trade credit terms. Trade credit is when you deliver a product and invoice it for Net 30 or Net 60. This gives the client 30-60 days to pay off the balance they owe. Essentially you do not need to perform credit checks on the businesses to make sure they will pay you but it doesn't hurt to ask them for the following:

  • Supplier references

  • Company structure

  • Banking relationships

  • Commercial references

Check over this information to find out what type of relationships they have with their current lenders and to find out their past payment history. If you offer trade credit, you must have a cash reserve to fall back upon while you wait for payment. Do not advertise that you offer trade credit; only offer it to the companies that demand it like government agencies and Fortune 500 companies.

If you fail to collect on your trade credit invoices, hire a factoring company. They will provide you with cash today and handle all of the messy collections for you. It's a perfect way to fix a large cash flow problem so you can pay your employees and payable accounts.

Check your state laws to make sure you are in compliance with all credit laws. Some states have a set limit as to how much money you can charge in interest and annual fees. There are also stipulations about advertising credit because so many consumers have been misled by companies that are trying to turn a large profit. Always provide your customers with detailed information about your credit terms before they sign-up to help avoid confusion and costly legal matters in the future.

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