Selling on credit can open doors to more sales and stronger customer relationships—but it’s not without its challenges. One late payment here, one defaulted account there, and suddenly your business is facing cash flow issues you didn’t anticipate.
That’s why it’s so important to find a firm answer to the question, “What are the problems associated with selling on credit?” Knowing the risks before they affect your bottom line lets you take smarter steps to protect your business.
In this blog, we’ll walk you through the most common credit sales-related problems, how they impact businesses, and the proven solutions you can put in place to stay financially secure while still growing your customer base.
A credit sale is a specific transaction that occurs when a business offers a product to a consumer with the understanding that they will pay for it later. Payment terms are established before the commodities exchange, specifying the date and method of complete payment. A down payment from the customer is often required in a credit sale.
This flowchart illustrates a standard payment term “a/b net c,” where “a” represents the discount amount, “b” represents the discount period, and “c” represents the invoice due date.
Example: Suppose you issue an invoice for $1,000 of office supplies under 3/10 net 30 terms. Let’s understand what this payment term essentially means.
Credit sales often encourage consumers to purchase more items because they do not require as much cash to complete the transaction initially. This strategy can work exceptionally well in sectors where big purchases are common and upfront costs can deter buying.
Did You Know? Cash sales are transactions in which the buyer pays for the goods immediately. Whereas, credit sales are marked as short-term assets on your balance sheet. Since your assets are not yet in your account, it is technically classified as accounts receivable.
Despite numerous benefits, such as encouraging large purchases, establishing better customer relationships through flexible payments, and increasing sales volumes, selling on credit comes with its share of potential risks or problems. We’ll discuss them next.
While credit sales have the potential to take your business to new heights, they also come with the following problems that you need to consider carefully:
The above flowchart outlines the key challenges businesses face when selling on credit.
According to the PYMNTS Intelligence report, 64% of companies face delayed payments, with suppliers typically waiting an average of 43 days to receive funds.
Clients occasionally fail to make their invoice payments on schedule. As a result, you have many outstanding bills, which hurt your cash flow and increase your accounts receivable.
Example: Imagine your company delivers $5,000 worth of services to a client with net 30 payment terms, expecting payment by the end of the month. However, if the client doesn't pay, the invoice remains outstanding even after the due date.
As a result, your accounts receivable balance increases, leaving you with $5,000 tied up and unavailable for reinvestment or operating costs. This payment delay negatively affects your cash flow, making it harder to meet your financial obligations or take on new projects. You'll face significant liquidity issues if this pattern continues with multiple clients.
Pro Tip: To mitigate this issue, you may use a line of credit with a bank (e.g., an overdraft, invoice discounting, etc) or ask your suppliers to extend better credit terms to your company.
In severe cases, a client may become insolvent and file for bankruptcy before making the required payment. This puts your business in danger of missing out on payments because there is no means to recover the damages.
You may have to give the account to a collection agency, where you’ll incur fees. If they fail to recover the debt, you must write it off as bad debt. Thus, you lose out on revenue.
Also Read: Solving Top Accounts Receivable Challenges
Selling on credit requires maintaining multiple records. Each time a payment is received, you must update the accounts receivable record, reconcile it against the original invoice, and adjust the customer’s outstanding balance after deducting the payments.
As a result, you’ll need additional books to keep all the records, raising the cost of bookkeeping.
Credit control can be very taxing for your business, from conducting upfront checks to following up with them, not to mention pursuing them if they fail to meet payment deadlines. Significant resources and time may be needed for this, resulting in lower revenue.
Example: Imagine your company has $50,000 overdue invoices from various clients. Without an in-house debt collection team, you or your staff will need to spend hours each week following up with clients, sending reminder emails, making phone calls, and negotiating payment terms.
This time-consuming process limits your ability to focus on growing your business. Additional resources like software, communication tools, and possibly even legal services are required if the debts remain unpaid.
Maintaining an uncompromising credit management attitude while pursuing payments can occasionally strain customer relationships. It can be challenging to walk a tightrope since you do not want to ruin your future connections by using strict credit control methods, which is often the only way to get paid.
Example: Suppose your company provides $10,000 worth of goods to an old client on credit terms, expecting payment within 30 days. When the payment is delayed, you begin sending reminders and follow-up calls. However, as the days stretch, you must escalate your efforts, perhaps even threatening legal action, to recover the funds.
The frequent reminders or pressure to pay may irritate the client, even though these activities are essential for your cash flow.
Do you find managing credit sales debt difficult? Is your business suffering from late payments and delinquent accounts receivable? Let South East Client Services inc (SECS inc) help overcome the challenges associated with credit selling. Our expert team is here to help you navigate debt management with precision and ease.
While these challenges can feel overwhelming, there are effective strategies and best practices you can implement to manage credit sales more efficiently and maintain healthy cash flow. Let’s explore them next.
As a business, you may be concerned about the problems associated with credit sales, but you can manage and control them. This section outlines various strategies and techniques your business may employ to optimize the advantages of credit sales while lowering the associated risks.
The above flowchart highlights six essential strategies for tackling challenges in credit sales, where each strategy is a step toward enhancing credit sales management.
Do background checks to determine a customer's ability to pay before giving credit. The most straightforward approach is to get their credit score through credit checking services. Customers with a high score and a good credit rating will be considered creditworthy and have a solid track record of paying back other suppliers.
Pro Tip: Readily exclude businesses that pose a high risk from purchasing goods or availing services on credit.
Asking clients for deposits ensures that you’ll at least receive a portion of the money in cash. In addition to lowering your losses if they cannot repay, you can also take this approach to deter unreliable clients from opting for a credit purchase.
Consider asking clients with lower credit scores for greater deposits. Getting a bigger down payment to minimize losses makes more sense because they are more likely to miss payments.
Example: If your company sells $5,000 worth of custom products on credit, you may request a 20% deposit upfront, which amounts to $1,000. If the client has a lower credit score or a history of missed payments, you may increase the deposit to 30% or $1,500.
Maintaining financial stability requires establishing and maintaining clear standards for creditworthiness and terms of sale. You should also specify what clients will be charged if they fail to meet the credit terms, including late payment fees.
For instance, mention that if monthly installments are not made by the due date, interest will be charged until the money is received. This will encourage clients to pay on schedule, which often shortens the typical time your business takes to receive payments.
Ensure your credit control policies are regularly updated with the most recent rules and industry best practices. This allows you to retain positive relationships with customers by making credit decisions more consistently.
Pro Tip: Leverage technology such as automated billing systems and credit scoring to enhance efficiency and reduce the risk of human error.
Credit insurance can reduce the risks associated with selling on credit terms by protecting against bad debt and late payments. Additionally, there are funding options that lessen the impact of credit sales on cash flow. One way to close the cash flow gap is through invoice finance, which releases up to 90% of an invoice's value within 24 hours of being issued.
Also Read: Accounts Receivable Management and Cash Flow Practices
Be stringent and periodically assess your connections to determine which of your clients are "valuable" and which are costing you more in management than their business is worth.
While terminating a client's relationship is probably a last resort, it is crucial to remember that a customer is no longer worth the money they spend with you if they interfere with your ability to generate a healthy and steady cash flow.
These pointers are essential for businesses of all sizes that employ credit sales. They help you create a good credit policy to guarantee your company's long-term financial stability.
Selling on credit is a powerful tool to grow your business, but it has specific problems. From understanding what a credit sale is to managing the issues associated with selling on credit, including unpaid invoices and increased accounts receivable, it is crucial to take proactive steps to protect your business.
Implementing practical solutions, such as requesting deposits, offering early payment discounts, or using legal collection procedures when necessary, can mitigate risks and maintain healthy cash flow.
However, if navigating these strategies feels overwhelming or if you're unsure how to implement them effectively, South East Client Services inc (SECS inc) is here to assist. Our team provides expert guidance tailored to your needs, helping you manage credit sales more efficiently and reduce financial strain.
Contact South East Client Services inc (SECS inc) today for legal advice and support on managing delinquent receivables and securing your business’s financial future.
This communication is from a debt collector. This is an attempt to collect a debt and any information obtained will be used for that purpose.
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