BUSINESSES AND people cannot have money all the time. There are certain times of the month when one runs out of cash and they urgently need some services or goods. At some point of doing business, the business has to face customers who want to have your goods or products on credit. They may be loyal or new customers. It is at this point that you have to decide whether they can extend credit or not. This is because it could affect your businesses cash flow and the profits. When a business owner decides to develop a credit policy, there are things to consider such as:

The effect the credit policy will have on the revenue from sales.

Customers may come to you without the money but they want the goods; they will have to delay their payments until a time they are able to pay. This could bring more business to you because people do not forget those who make getting what they want more convenient. This may be good for the customer but it may to some extent hurt you and your business if they end up not paying. The customer may also simply delay the payments longer than was agreed, which can sometimes be just as bad for you and your business.

Look at how the credit policy will affect the cost of other goods to be sold.

Many businesses usually have products and services in stock. When credit is given, it translates to one not paying immediately for a product that is purchased, unlike if it is on a cash basis, where the product is paid for immediately. This, therefore, means that your business should have sufficient cash flow so as to cover the payments which have been delayed. That is not all; any interest that the money may have gained is lost. It may also mean or translate to a trade off; many customers buying at prices that are high so as to compensate for the interest that was lost or low inflow of cash.

When developing a credit policy, business owners should put into consideration the debts that will not be paid. Not all customers stick to their word; some vanish into thin air immediately they are given the product on credit. When cash sales are made, no bad debts can be expected but it is the norm once you start giving credit.

When developing a credit policy, you should also give space for cash discounts on credit. This is especially used when one business gives credit to another business. The borrowing business has an option of repaying the credit on the discount period so as to get a discount but if they do not, there is no discount and it has to be paid in a certain period. The deal could be that if they pay within the discounted period, a 2% discount is offered. If not paid, then the credit is due in the time that was agreed. Deciding to give credit can have serious consequences especially if the business has just started and you do not have enough capital. It could cost you and your business big.  Decide if you are ready to amass late payments or not.  It has been proven that a credit policy that is reasonable can help the business retain and attract more customers and increase profits.