In these challenging times, small business owners are constantly on the lookout for ways to increase sales and build customer loyalty. You may already have tried special offers, giveaways, certificates, and discounts. But have you tried extending credit to your customers? You should, because it’s a strategy proven to increase sales by as much as 50%. It can also attract new varieties of customer to your business, since credit appeals to potential clients who want to conserve their cash.

Extending credit allows customers to purchase your products and/or services upfront and defer payment until a later date. Of course, the larger the purchase your typical customer makes, the greater the risk you face.

Keep in mind, though, that you can control the risk to some extent, because you’re the one who determines the credit terms. Some companies extend 100% financing to customers, while others may require a 25% or 50% down payment on the purchase price.

Factors to consider before giving credit to customers

Before you decide whether to extend credit and if so, how much, there are several key factors you should consider:

Credit risk

Define the amount of risk your business is willing to accept. Do you have the financial resources to support the transaction? As part of this assessment, you’ll need to consider the possibility that you won’t get paid at all.

Credit terms

Decide how much credit you’re willing to extend and how long you can afford to wait for payment. The terms can vary all the way from 10-day terms to 90 days or more. Requiring a certain percentage down can minimize your risk. Many companies do this on the first few purchase orders before they offer 100% financing.

Credit qualification

Will you extend credit to both consumers and businesses? If so, how will you determine their creditworthiness?

For consumers, you may ask for a simple credit application with references. Or you might take it a step further and run a credit check with a consumer credit agency.

More articles from AllBusiness.com:

• The Dos and Don’ts of Extending Credit to Customers
• Should You Extend Trade Credit Terms?
• Checking a Customer’s Credit
• How to Establish a Credit Policy
• Should Your Business Extend Credit?

For business customers, you may want to ask for a credit application and check with a business credit agency. There are a variety of reports you can pull, and if you expect a large number of applications, you can even subscribe to a business credit bureau and get unlimited reports.

Credit policy

Develop a credit policy that covers the entire process when extending credit to customers, from application submission all the way to past-due collections. The more details you have worked out ahead of time, the better your accountant, sales staff, and management team can facilitate your program.

Credit review

Be sure to observe the number of purchases a particular customer makes after you extend credit by conducting a credit review every several months. After your review, you may consider increasing the credit limit, especially if the customer requests it and has a solid payment record.

By extending credit to customers, you can separate yourself from competitors, increase sales, and gain a greater market share. While there is risk involved, if you use the key factors outlined above as a guide, you can provide yourself some protection.

FAQs about granting credit

Below we have summarized the most important questions and answers on the subject.

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