How much does it really cost to provide trade credit?
As a business supplying to others, it’s likely you’re either already offering trade credit, or considering it.
While it can seem like the best way to maintain your relationships with your customers, trade credit accounts often come laden with, at best, extra work for your business, and at worst, unrecovered debts.
By offering delayed payment options, you accept a host of risks that can impact the growth of your business. Below, we discuss the hidden costs of providing trade credit to your customers.
An opportunity cost is a potential loss you incur from choosing one opportunity over other/s.
By allowing your customers to delay their payments, you have less cash flow available to your business. The opportunity cost of offering trade credit, is therefore, anything you may have been able to invest this capital in that you’re now unable to until it’s repaid. It could be as simple as missing out on accrued interest, or as substantial as being unable to commit to a growth opportunity, like leasing a larger warehouse, because the funds you need are tied up in trade credit agreements.
By choosing to offer trade credit, you forgo other opportunities, running the risk of missing investments that will reap benefits for your business in the long run.
Managing trade credit accounts require staff and systems to make them work as smoothly as possible for all parties involved. From assessing applications, to following up unpaid debts, your internal resources become tied up just maintaining these accounts.
Drawn out cashflow
By managing the assessment, credit checks and approval of applications internally, there can be a substantial waiting period during the onboarding of a new customer and when you can accept and process an order.. This not only delays your incoming cash flow but can also be frustrating for your customers, who may require their supplies in a time-sensitive period.
While many think that offering trade credit is a great way to improve or maintain customer relationships, the additional processes involved can actually work against you. Tedious application processes, drawn-out application assessment times and the inevitability of chasing up late payments can all negatively impact your business relationship with your valued customers.
It can’t be ignored that by extending trade credit to your customers, you assume a higher degree of risk for your business by provisioning the debt on your balance sheet. The downsides of getting it wrong include the increased resources involved in chasing late payments, the impact of late payments on the functioning of your business and, if unsuccessful in obtaining repayments, the losses incurred to the business through bad debts.
So, what are the alternatives?
Debtor finance is one solution available to assist businesses with the cash flow issues that accompany offering trade credit. Debtor finance involves obtaining an advance on your owing sales invoices, up to a certain percentage set by the debtor finance facility. Once the invoice is paid by your customer, you will receive any remaining amounts, less fees charged.
While this can improve operating cash flow, the risk is not absolved by the third party finance company, and you will still be liable to ensure the invoice is paid by your customer.
Purchasing credit insurance can help with risk offset, as it involves transferring risk away from your business, with the insurer holding responsibility for any unpaid debts. Credit insurance can protect your business on the occasion that a customer becomes insolvent or fails to repay their trade credit debts. However, credit insurance does little to assist cash flow issues attributed to providing trade credit.
Finstro is a complete solution, acting as an alternative to offering trade credit. An answer to the concerns associated with trade credit accounts, by partnering with Finstro your business benefits from reduced costs, removed risk and increased cash flow. Replacing the need for an internal trade credit system with account receivables service specialist, you’re free to focus on your core business and invest in your growth.
If you’re asking, “How much does it really cost to provide trade credit?” The answer is, it’s a lot more than you think.
With third party options available, it’s important to consider which option best suits your business. Ideally, you want to maintain strong, positive relationships with your customers, while minimising the risk and lost opportunities to your business.
With alternatives available to assume the risk and manage the repayments in a way that can be tailored to your customers individually, your business reaps the benefits while minimising the risk.
Follow Finstro today, for more insights into growing your business with flexible finance solutions.
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