In today’s economy, it is essential to be able to allocate credit where it is needed most. This means that businesses need to have accurate and up-to-date information about their customers’ creditworthiness. While nearly 60% of U.S.-based B2B sales are paid using customer credit, knowing how much credit to extend and to which customers is of dire importance. Issuing too much credit to the wrong customers can lead to disastrous outcomes.
Customer credit has become a more popular form of payment in both B2B and consumer transactions. But incorporating customer-issued credit into your account receivable workflow can be intimidating, especially if you’re new to the process.
Interest rates are on the rise, so it is more important than ever to make sure that your business is doing everything possible to mitigate risk. Stay ahead of the curve by leveraging automation for customer credit scoring.
What is customer credit?
Customer credit is an arrangement between a buyer and a seller in which the buyer agrees to purchase goods or services now and pay for them at a later date. The terms of customer credit are typically agreed upon before the sale is made. The most common type of customer credit is called revolving credit, which allows customers to make purchases up to a certain limit and then pay off the balance over time.
There are many benefits to offering customer credit, including:
- Increased sales: Customers who can’t afford to pay for your goods or services upfront may be more likely to make a purchase if they can pay over time.
- Improved cash flow: When customers pay over time, businesses can delay payments to their suppliers, which can help with cash flow management.
- Increased customer loyalty: Offering credit terms can show customers that you trust them and are willing to work with them, which can lead to increased loyalty and repeat business.
However, there are also some risks associated with offering customer credit, including:
- Bad debt: If customers don’t pay their bills, businesses can end up losing money on the sale.
- Increased administrative costs: Businesses may need to hire additional staff to handle customer credit accounts and collections.
- Credit risk: Extending credit to customers can be risky, especially if they have a history of not paying their bills on time.
How can I mitigate risk with customer credit reports?
One way to mitigate risk is to run regular credit reports on your customers. Credit reports can help you assess a customer’s creditworthiness and identify any red flags that may indicate they are a high-risk borrower. You can also use credit reports to set credit limits for new and existing customers. Automated accounts receivable (AR) tools can help small and medium enterprises (SMEs) build their own custom credit rules, making the process easier and more accurate.
What are some credit policy options?
There are a few different options when it comes to setting a credit policy, including:
- Extending credit to all customers: This option is suitable for businesses with low-risk customers and good cash flow. All customers will be extended credit, regardless of their creditworthiness.
- Extending credit to some customers: This option is suitable for businesses with a mix of high- and low-risk customers. Customers with good credit scores will be extended credit, while those with poor credit scores will be required to pay upfront.
- Extending no credit: This option is suitable for businesses with high-risk customers or limited cash flow. No customers will be extended credit, and all payments must be made upfront.
Which option is right for your business will depend on a number of factors, including the type of customers you have, your cash flow situation, and your risk appetite.
Thriving in today’s economy
In today’s economy, it is more important than ever to be able to assess credit risk and make sound decisions about extending credit. By leveraging automation for customer credit scoring, businesses can make the process easier and more accurate. This can help businesses save time and money, while also reducing the risk of bad debt.
Organizations that are able to thrive in today’s economy are those that are able to adapt and change with the times. By leveraging automation for customer credit scoring, businesses can stay ahead of the curve and mitigate risk.
AR automation tools like Lockstep Receivables provide the tools for organizations to build custom credit rules, scores, and reporting based on their unique business needs. Through providing customer credit, small and medium enterprises (SMEs) can procure a product or service on credit terms (much like a credit card).