Trade Credit: The Pros and Cons

Trade Credit: The Pros and Cons

Most business owners find out that it is not possible to thrive in the modern marketplace with cash-only sales. Customers are more likely to purchase your goods and services if you offer credit terms. Here are some of the advantages and disadvantages of providing trade credit to your customers.

Increase Sales

The primary reason that businesses offer trade credit is to boost sales. Customers are used to being offered credit terms, and if you insist on cash-only interactions, people are likely to go elsewhere for the products and services they need. The option of trade credit, however, will draw clients to you.

Create Loyalty

When you provide trade credit to customers, you create an atmosphere of respect, confidence, and trust. Customers sense this and in turn purchase more from you and remain loyal to your company.

Provide Incentives

Although trade credit involves giving your customers extra time to pay their bills, you can incentivize them to pay sooner by offering discounts for early payment. In this way, you attract them with your credit terms but still persuade them to pay promptly.

Get an Edge on Competitors

If your company provides trade credit but your competitors do not, you have a distinct advantage when potential customers consider who to buy from. People will be drawn to the company that offers credit terms.

Consider the Drawbacks

Despite the numerous advantages of offering trade credit, there are a few drawbacks. For instance, your cash flow may falter while waiting for customers to pay. You have to invest the time and money in checking out the creditworthiness of clients before providing credit terms. You have to monitor your accounts receivable. There is always the possibility that some clients will not pay on time, which leads to follow-ups and collection efforts.

For more advice on trade credit and its advantages and disadvantages, get in touch with Skogen Capital Lending.