The Basics of Extending Credit in a B2B Space

January 16, 2020
Whether you’re a small business starting to grow or a mid-sized business looking to meet the needs of more customers, you might be mulling over extending credit to some of your clients. When extending credit in a B2B space, it’s critical that you have a thoughtful, formal approach to ensure that you extend the correct amount of credit to worthy clients who will repay their debts. Because small and mid-sized businesses are more vulnerable than big businesses, they often cannot afford to extend credit to the wrong customer.

Why Businesses Extend Credit

  1. Extending credit can increase your overall cash flow, as many clients will gravitate towards more generous payment terms that allow them to also be more versatile with their cash flow. You might be surprised how many new customers you get when you allow 30 days for payment instead of requiring it upfront.
  2. When businesses have more flexibility in when they pay, they can also often afford to spend more and adapt their monthly budget accordingly. Extending credit in a B2B space can lead to bigger ticket purchases, particularly if you allow clients to set up a payment plan outside of a traditional 30-day or 60-day structure.
  3. Improving customer loyalty should always be a priority at your business, and offering them credit is one way to do so. When your customers can manage their cash flow easily and know that they have a credit option with you, they will be much more likely to not look elsewhere, even if a competitor is slightly less expensive.

How Can You Start Extending Credit in a B2B Space?

A full credit policy, where businesses have a certain limit and generous terms to repay it, is not right for every business, especially when extending credit for the first time. It is often best to selectively offer credit to customers who meet certain standards.
  1. Get a credit report for the business that is requesting credit. If you do approve them for credit, continue to pull this report quarterly to ensure that everything still looks good.
  2. Ask for references that demonstrate the company’s ability to make timely payments and call them to follow up.
  3. Never extend a line of credit to a company with bad credit or no customers unless you are completely confident in their ability to pay you back. Make sure you are able to take the loss without harming your business, if they end up not paying you back. If you know the owner of a start-up and have faith in their track record of success with other companies, for example, it might be a perfectly safe idea to extend them credit.
  4. When you do extend credit to a business, always create a formal document outlining when the business needs to pay you, interest that will accrue, fees for late payment and other details that protect both parties. That way you have a solid contractual base, in case you do need to take them to collections.

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