Many companies are offering consumer credit as a way to gain customers, but is it a good idea for you? Here are some advantages and disadvantages of offering consumer credit.
There are advantages to offering consumer credit. The main advantage is that it allows you to remain competitive. If your competitors are offering consumer credit and you’re not, you could lose business since customers are more likely to choose the business that allows them to pay less up front, even if it turns out to cost more over time.
If none of your competitors are offering consumer credit, you may have a large increase in sales which will increase revenue. Offering consumer credit allows your to build a relationship with your customer. People like to buy from people they trust and by extending your faith to them (through credit), they are likely to continuing purchasing from you. You also have the opportunity to provide incentives or discounts for early payment.
There are some disadvantages to offering consumer credit. Outside of the inevitable because some people are just not going to pay—offering consumer credit negatively impacts your cash flow. Because you offer payments over time for items that are received immediately, you won’t have the cash on had for all of your other business needs (i.e. operation costs, payroll, etc). You will also have to manage the cash flow within your accounts receivable in order to cover the temporary loss. You can do this by negotiating better terms with your own lenders and/or suppliers, or by using a business line of credit.
You also take on the responsibility of assessing credit risk and someone will have to manage and keep up with accounts receivable by calling those who don’t pay and ultimately you run the risk of bad debt. Putting the debt into collections costs money and if they never pay you have to write the debt off as bad debt.
Offering consumer credit is a big decision to make. Take it slow and make it wisely.