Credit Factors

Here's a look at the factors that will play a role in your decision whether to offer credit to your customers:

Your industry. If the custom in your industry is to provide credit, you may have no choice but to offer it. If you own a fast food restaurant, you probably can get away with requiring full payment in cash. But if you're a consultant or a lawyer, you may lose business if you don't extend credit. An angle you should consider is whether you can gain an advantage over your competitors by offering credit where the industry custom is not to offer it. Can you make more money by letting your customers buy a hamburger with a Visa card? If you can, perhaps you should.

If the type of business you're in is one where credit plays an essential role, you also may have no choice but to offer credit. For example, if you sell your goods through the mail, you'll probably have to extend credit to your customers.

Your customers. The more dependent you are on repeat customers, the more likely it is that you'll extend credit to them. If your business is catering, you may be more likely to extend credit than if your business customers are tourists.

The better you know your customers, the more likely it is that you'll extend credit to them. If your business is consulting, you're more likely to offer credit than if your business is palm reading.

The bigger your customers are and the more buying power they have, the more likely it is that they'll dictate to you whether you offer credit. If your business is selling goods to IBM, you're more likely to offer whatever means of payment IBM wants than if your business is selling lemonade to the neighbors. Also, the wealthier your customers are, the more likely it is that you'll extend credit to them (which, when you think about it, is sort of ironic, at least in terms of need).

Your location. The more economically depressed the area surrounding your business is, the less likely it is that you'll extend credit to your customers (assuming you sell goods and services to people in the community). If your business is selling shoes in a poor area of town, you're less likely to extend credit than if you sell shoes in a wealthy area.

Your transactions. The larger your typical transaction is, the more likely it is that you'll have to extend credit. If you sell your own oil paintings at art fairs, your customers will probably expect to be able to pay by credit card. On the other hand, if you sell ice cream cones at art fairs, your customers should expect to pay in cash.

Your financial condition. The stronger your financial condition and the better your cash flow, the more likely it is that you'll extend credit. If your cash flow is poor, and you cannot afford to carry much credit, then you'll be less likely to extend credit than if your financial condition were stronger.