Offering credit is a central feature of many B2B and B2C businesses in Phoenix and Scottsdale. Construction companies, manufacturing firms, law firms and other professional service providers, as well as retailers and healthcare providers, offer installment plans or deferred payment options in various forms.
Consumers and business partners may expect their service providers, vendors or retailers to extend credit in many circumstances. Unfortunately, there are some unique risks that come with offering credit to clients and customers. While some of these risks can be mitigated, many of them are unavoidable.
The most obvious way extending credit can put a business at risk is through cash flow disruptions. Failure to receive payments can make it difficult for businesses to cover operating expenses. The severity of cash flow disruptions and the operational consequences are highly dependent on the business’s liquidity, the behavior of their clients and their margins.
If only a small number of clients or customers make use of credit, unpaid accounts may not be a serious risk. Problems are more likely to arise if multiple clients default at the same time, which can potentially happen during times of severe economic challenges.
Unpaid accounts can lead to shortfalls that make it difficult to cover overhead and operational expenses. Businesses may be forced to rely on loans or lines of credit to continue operations, putting them in an even more difficult long-term situation.
Relationships, including business relationships, are two-way streets. If your business is a preferred vendor and relies upon just a handful of clients for the majority of your revenue, the sustainability of your business may depend heavily on the actions of those business partners. Multiple late payments or delinquent clients can have far-reaching ramifications, and repeated issues may force you to deal with your clients differently.
Although it can be difficult, holding businesses accountable is vitally important, as no business wants to be in a situation where they struggle to pay their own suppliers or face reputational repercussions because they can’t collect the debts owed to them.
Unfortunately, enforcing contracts can lead to additional costs, including legal fees, that may further compound the cash flow challenges caused by unpaid or late payments.
Aggressive pursuit of unpaid invoices can be a full-time task that sometimes requires a team of people.
Managing overdue accounts, chasing payments, and dealing with collections can represent a significant operational expense for some businesses in Scottsdale and Phoenix. Putting in place safeguards to reduce the likelihood of late payments or defaulting is often preferable.
One of the primary ways in which businesses can make up their cash flow shortfalls and restore liquidity is by taking on debt of their own.
Some forms of debt can be more problematic than others. Lines of credit, like a business credit card, may be useful if credit is repaid within the billing cycle, but high-interest debt can lead to compounding issues for businesses that can’t afford to pay back their own debt quickly.
The optimal way to mitigate the risks inherent with extending credit can vary depending on the borrower.
Assessing the creditworthiness of the client prior to extending credit is one of the best ways to minimize the risk of default. Although credit checks are most frequently thought of as a consumer-facing tool, they can be used with business clients as well.
A business’s history should also factor into credit decisions. A client that has been operating for decades and maintains a good reputation among their vendors is likely less of a credit risk than a new small business with an uncertain future.
Setting clear credit terms is also one of the most reliable ways for vendors to prevent outstanding receivables. Define payment due dates, interest for late payments, penalties, and credit limits upfront in any business relationship to avoid misunderstandings.
If invoices go unpaid, there should be no doubt over the penalties or your business’s legal rights and collection options. Enforcing these late payment penalties is key, even if there could be repercussions for the business relationship. It’s better to have an annoyed client than to miss payroll or fail to cover your own overhead.
Some businesses also extend incentives for early payment, like discounts, that encourage clients to settle balances sooner.
Businesses that depend on a handful of clients for all their revenue should strongly consider diversifying their client base. A business that could be put at risk by a single client failing to pay on time is in a fundamentally precarious situation, even if late payments aren’t currently a problem.
Some Phoenix or Scottsdale SMB owners operate in industries where their clients expect their vendors to extend credit. There are ways you can mitigate the risk of outstanding receivables. Call H&H Accounting Services at (480) 561-5805 to learn about some of the solutions we can help you implement.
