- Pros Of Offering Credit
- Likely To Sell More Expensive Products
- Have A Competitive Edge
- Enhance Your Reputation
- Gain Customer Loyalty
- Cons Of Offering Credit
- Late Payments And Bad Debt
- Cashflow Impact
- Receivables & Collections Management
- Types Of Credit You Can Offer
- 1. Installment Closed-End Credit
- 2. Revolving Open-End Credit
- 3. Non-Installment Credit
- Can You Get Rid Of The Cons? Yes!
You may have an amazing product on your hands, but getting new customers is a challenge for any company in today’s landscape. There are all types of game plans in the book on how to attract new customers.
Imagine this scenario. A new customer, Mr. X, currently falls outside your target market as he might not be able to afford to pay for your product in one go. What do you do now?
Do you let go of Mr. X, or do you reduce your prices? We have a third option for you – provide a flexible payment option to this customer. We are talking about financing here.
Providing the credit usually involves charging an interest rate during the tenure of the debt as compensation to the lender for taking on the risk of the debt.
Pros Of Offering Credit
Likely To Sell More Expensive Products
By offering credit to Mr. X, you have not only acquired this customer but have also opened up a larger range of products for him.
If he was at first debating whether to even purchase a product costing USD 1,00, he might now likely be open to even a USD 5,000 product just because he has a way to.
Have A Competitive Edge
This tactic will surely help you stand apart from your competitors who are struggling to broaden their target market.
Picture two dental clinics that just opened up in the neighborhood. They would both be reaching out to the same people on the block, hoping to convert them into customers.
However, one offers dental financing to its patients through a partner at a very reasonable interest rate while the other does not. Which store stands out?
Enhance Your Reputation
Not every business can manage to offer credit to their customers. Thus, by doing so, you are announcing that you can afford to do this, i.e., you are financially sound.
Mr. X will now be telling Mr. Y and Mr. Z about this service you are providing. This creates a pull to get more eyeballs on your company.
Gain Customer Loyalty
By providing your customers with such a convenient solution, you tell your customers that you trust them to pay you back.
Cons Of Offering Credit
Late Payments And Bad Debt
Out of every 1000 customers, you would definitely have a handful who would delay payments. You have no guarantee that these customers will pay on time or pay at all.
It’s true that businesses often charge a fee for late payments, but it means you will have a major risk on your hands because clients can still continue to defer payments.
If you predicted that 20 customers would be paying back USD 20,000 this month, the delay in payments would have your whole cashflow plan go haywire.
Thus, accounting for this delay in payments or bad debt would be the right way to look at it.
Receivables & Collections Management
You might need to appoint a team who would be handling the collection from these customers. Regular follow-ups and reminders to customers is a regular practice, increasing costs as a result.
In fact, it would be even more time and cost consuming in case you need to take legal action against customers who would just not pay up.
Types Of Credit You Can Offer
Now that we’ve looked at some perks and flaws of flexible financing, let us throw some light on the different forms of credit options you may offer your customers.
1. Installment Closed-End Credit
This type of credit gives your customer the flexibility to purchase one or a few items from you. This amount can then be paid back in pre-determined installments over a period of time, either monthly, bi-monthly, quarterly, etc.
With this option, a customer can then plan exactly how much he/she can and will pay over some time.
This flexibility gives the customers quite a sigh of relief by spacing out the big expense into smaller chunks. A far better alternative than drilling a hole in the pocket in one go, don’t you think?
This especially helps in the case of medical emergencies where an option like financing can really help ease the customers’ pain point.
2. Revolving Open-End Credit
Think of this as having a limited tab at your favorite bar. During a period, you may purchase products on that tab but only up to a certain limit.
At the end of the period, you may pay off the debt and then restart the tab. This account does not shut unless you close the customer’s account entirely. Hence, it is known as a revolving open-end credit option.
A revolving credit also helps your customer plan the purchase a little in advance.
3. Non-Installment Credit
This type of credit involves the customer paying back all of the amount owed in a lumpsum amount.
For example, you are an interior design company, and you offer home improvement financing to Mrs. Y. She accepts this option of a non-installment credit.
This means Mrs. Y would perhaps pay a small amount as a down payment when the project begins and pay the remaining amount she owes after the project is done.
Whilst this option means that the customer does not have to pay the whole amount till a certain date, he/she needs to arrange for the lump sum to be paid at one go, which can be difficult, especially if it is an expensive purchase.
Can You Get Rid Of The Cons? Yes!
What if we told you that you could keep the pros of the financing and do away with the cons? This is possible if you partner with a financing company that gives the loan to YOUR customers on YOUR behalf.
As soon as your customer passes the financing criteria, they get the loan, and YOU get the entire amount of your goods and services.
This financing partner allows you to concentrate on your core business and takes on the risks of the financing on itself.
Right from understanding your business requirements to designing payment structures that result in maximum profits, a third-party financing company can give your company the edge it needs.