SHOULD YOUR BUSINESS GIVE OUT CREDIT OR NOT!?

By Jaluum Herberts Luwizza. Twitter_@jaluwizza Tel:0787555919 ..

As a business should you be giving out credit or not!?? Many business owners have struggled with this question. Personally I think credit can be a good customer retention incentive if handled well. I don't believe there is any successful business that doesn't give out credit. Banks give loans; Telecom companies give airtime on credit. Most big businesses actually don't make instant payments so it's about waiting for a period of time to get paid, most ask for a 30 day payment period. So in this sense giving out credit is fine and if used well credit can be a catalyst for growing customer loyalty and offer an inexpensive customer retention incentive.

Like I said if managed well, credit can do so much to boost business growth. The trick is in credit management. How then does one handle credit in their business!? For starters, it's good to have a system in place that helps your business manage credit. A system that helps you determine whom you give credit, when you give credit and how much credit you give. Basic systems like credit caps can be used.

If you run a shop for example, you could say never at any one point should extended credit exceed UGX.100,000. If you hit the ceiling then no more credit until collection is done to open up room for more credit to be given out where and when necessary. Credit should never be extended to first time buyers or recent customers because you don't know their ability to pay (in includes financial ability and willingness to pay).You could give credit to someone who is a willing payer but doesn't have the ability to pay or one who has the ability but has a poor will to pay credit, in both scenarios you won't get the business' money back which isn't good for business.

 It should be used be used as an incentive to keep around longtime loyal customers with both the ability and will to pay over and agreed period of time. Credit should always be time bound to minimize the opportunity cost of money, so you can say someone will pay when they want.

As a business you should have a repayment period of your choice that doesn't exceed 30 days advisably. Put a small cost to the credit to discourage it or cover for opportunity cost of money. It's why when you borrow 1k airtime from whichever Telecom operator, you pay back with an extra 150 shs or so. This means you pay back 1,150 shs. Something like that. The 150 covers for the opportunity costs of money just like the bank interest does. At YOUNG TREPS for example if you wanted say to register your business with our help, we would charge you 600k if you pay it up at once. If you want to pay in installments it's 700k with a payment period of two weeks. Anything beyond that attracts another 100k in late payment charges and we explain this carefully to the client as we discuss payment terms.

So give out credit but be sure to manage it because I have seen many businesses that have failed due to failure to manage credit. They don't have money internally to run but have a lot of money outside in form of credit owed by customers. So it's not about whether to extend credit as a business facility or not but how to manage credit as a business facility. Businesses that have gotten that balance right have managed the thrive.

Jaluum Herberts luwizza is a writer, Speaker and Business consultant with YOUNG TREP .

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