Business is a competitive endeavor. No matter the business you do, you will surely have competitors. If your competitors sell on credit to their customers, you have to implement a similar approach to keep or gain new customers.
However, selling on credit is not without its disadvantages. In this post, we have explained the effects of selling on credit on your business. We have listed 5 advantages and disadvantages of selling on credit.
If you are not yet sure if your business should sell on credit or not, read this post to help you know what your decision will be.
5 Advantages of selling on credit
Contents
Listed below are 5 advantages of selling on credit.
- Selling on credit gives a competitive advantage
- Selling on credit may lead to an increase in sales
- Selling on credit shows strength
- Selling on credit enhances customer loyalty
- Selling in credit leads to increased profit
Selling on credit gives a competitive advantage
If your competitors sell on credit, you may need to sell on credit too. You can make your offer more palatable than that of your competitors by giving them some discount when they pay early.
Even if your competitors don’t sell on credit, selling on credit will give you a competitive advantage. Your customers will have another option of payment other than paying immediately.
Selling on credit may lead to an increase in sales
One of the advantages of selling on credit is that people are more likely to buy more goods when you sell on credit. Your customers can purchase various items when they have extended time to pay for the goods.
Also, if your competitors don’t sell on credit, customers are more likely to patronize you other than your competitors.
Selling on credit shows strength
When you sell on credit, your business will appear as a more established business. Most times, a new, non-established business doesn’t have the financial strength to sell goods on credit. Selling on credit is a way to tell your customers that you are ahead of others.
Selling on credit enhances customer loyalty
Another advantage of selling on credit is that it enhances customers’ loyalty. Selling on credit shows that you trust and value your customers even when they don’t have money to pay for their goods.
Customers will appreciate you for this by continuing to patronize your business. Customers will feel a level of loyalty when you sell on credit and this will make them keep doing business with you.
Selling in credit leads to increased profit
When you sell on credit, you can choose to raise your price a bit more than the normal price. Don’t worry, your customers will still buy since they don’t have the money to buy it immediately elsewhere. Increasing your price slightly is reasonable when you sell on credit and this will help you to make more profits.
5 disadvantages of selling on credit
Listed below are 5 disadvantages of selling on credit
- Selling on credit reduces cash flow
- Selling on credit may lead to bad debt
- There will be a need to keep up accounts receivable
- Selling on credit may affect your relationship with customers
- Selling on credit may cause your business to fold up
Selling on credit reduces cash flow
One major disadvantage of selling on credit is that it reduces cash flow. When you sell goods on credit, the rate at which money is coming in is lower compared to the rate at which your goods are going out.
When there is reduced cash flow in your business, you will not have enough money to pay some bills like staff salary, suppliers, or even miscellaneous expenses.
Selling on credit may lead to bad debt
Another disadvantage of selling on credit is that it may lead to bad debt. No matter how hard you try to ensure that all customers payback, there will still be someone who will not pay. When this happens, you will need to record the money as a bad debt which in turn may affect your business especially if we have recorded many bad debts.
There will be a need to keep up accounts receivable
When you sell on credit, you spend more money to fund accounts receivable. Most times, customers don’t pay on time and you will need to reach out to them, reminding them of their debts. In most cases, you spend extra money on airtime and data which may later affect your profits.
Selling on credit may affect your relationship with customers
Most times, the energy you get from customers when they want to buy on credit is not the same energy you get when it is time for them to pay back. Some customers don’t want to pay early and flare up when you ask them for your money.
You may end up losing these kinds of customers in the long run. Such customers may go about talking down your business and this may, in turn, affect your business.
Selling on credit may cause your business to fold up
Ultimately, the disadvantage of selling on credit is that it may cause your business to fold up. Bad debt will cause you to lose income and also the money invested in buying those goods.
If you keep recording bad debts that means that you are losing most of your capital. Before you know it, there will be no money to run the business again and this will cause your business to fold up.
FAQs (Effects of selling on credit on your business)
Is it advisable to sell on credit?
When you sell on credit, the chances of having increased sales are high. Your customers will want to buy from you because there won’t be any interruption in their cash flow at the moment. When you sell on credit, it increases customer loyalty. It shows that you trust your customers.
What are the risks of credit sales?
The major risk in credit sales is when you sell large numbers of goods on credit to a few customers. This means that if any of these customers refuse to pay on time, it will have a huge effect on the cash flow of your business.
What is the disadvantage of selling on credit?
The major disadvantage of selling on credit is that your business may fold up if you have many bad debts. If customers who buy on credit refuse to pay back, you will lose your capital which in turn will cause your business to fold up.
The decision to sell on credit is yours since you have known the effects of selling on credit on your business. You have to know 5 advantages and disadvantages of selling on credit. Weigh your options and choose what you think is best for your business.
Share your thoughts about selling on credit in the comment section. Also, remember to share this post with your friends and family members who are also in business so that they will know the effects of selling on credit on their business.
