4 ways providing longer credit terms can improve your business

In general, businesses are in a stronger financial position when they have more cash on hand as it reduces many operational uncertainties.

For starters, you will be able to run your business with greater peace of mind, knowing you are able to meet your monthly business obligations. You can pay your employees’ salaries and office rents on time, purchase new supplies and/or raw materials as well as continue to service your loans. For a growing business, the cash in your bank account gives you the confidence to invest in growth without shouldering higher business risks.

Playing a part in strengthening your customers’ cash flow

If all this is true for your business, it is also true for your customers – especially if they are business entities as well. So by giving your corporate customers longer credit terms, your business plays an integral role in improving their cash flow and strengthening their businesses. Of course, there are benefits to you as well.

Here are four ways your business stand to gain when you provide better credit terms to your corporate customers.

1. Improving your profitability

   If you are able to offer longer credit terms for your customers, you are effectively giving them greater buying power as they do not have to pay up immediately. By virtue of this, you may also gain a bargaining chip.

   In other words, you can negotiate a better price for your products or services if you are able to wait a little longer before your customers pay your bill. A higher price will translate into better profitability for your business.

2. Increasing sales from new and existing customers

   Not all businesses can or want to provide credit or extended credit terms. If you are in a position to do so, you may be able to grow your sales volume from new and existing customers.

   Since you are offering more attractive payment terms, you will naturally see more business prospects. Hopefully, you can convert some of these into new sales. For existing clients, if they are working with multiple suppliers, you are putting yourself in a position to win a bigger slice of their business.

3. Winning customer loyalty

   Giving your customers a longer credit term can help you develop deeper working relationships with them. The first thing you are signalling when you do not have an on-delivery payment requirement is that you trust that your customer will pay you – making your business less transactional.

   As mentioned, giving your customers a longer credit term also serves to improve their business. This can reduce their operational risk and potentially their costs as well. Once their business becomes accustomed to a favourable credit policy, you may see greater customer stickiness. In fact, if they choose not to do business with you anymore, they are actually increasing their business risk or having to press other suppliers which will not be ideal for them.

   By becoming such a close and valued partner, you will develop deeper customer loyalty and open new strategic business opportunities.

4. Earning a good business reputation

   Besides the signal that you trust a customer, the other signal is that your business is strong enough such that you do not need cash to be paid upfront whenever you deliver your product or service.

   Customers will view this positively and potentially earmark you as their preferred supplier. Beyond this, you may also be enhancing your reputation with other players in the market, including your competitors and suppliers. This can boost your bargaining power when talking to suppliers of your own.

Make sure you do not actually strain your own business cash flow

While you can enjoy real business gains from being able to offer longer credit terms to your customers, you do not want to sabotage your own business. At the end of the day, you need to weigh the payoffs. While providing longer credit terms can improve your customers’ cash flow, it will have an inverse relationship with your own cash flow – you will be slower at collecting your receivables and potentially run a greater risk of non-payment. Besides hurting your own business cash flow, you are also raising the risk of default from your customers.

Your reputation for providing credit may also go both ways. Though you are able to signal to the good customers that you trust them, you are effectively signalling to every other customer that you can provide a long credit term. And if you do not give it to them, it could work as a signal that you do not trust them.

Furthermore, the more customers that owe you money, the more administrative work you will have to do, such as monitoring your accounts receivables, forecasting your own cash flows and subsequently invoicing to collect your money.

Therefore, it is common for businesses to explore financing options with their bank to mitigate the risks introduced by providing longer credit terms. With OCBC, your business can use Invoice Financing to protect your own cash flow while still being able to offer longer credit terms to your customers.

How does Invoice Financing work?

After you complete your transaction with your customer, you can apply for Invoice Financing with OCBC. This will allow you to convert your invoices into cash so that you effectively receive an advance payment for your sales despite offering attractive credit terms. Upon hitting your loan maturity date, or the date that you are supposed to receive payment from your customer, you will simply need to repay the bank.

In this regard, you continue with your administrative follow-ups with your client and ultimately bear the credit risk if your customer does not end up paying their invoice or makes a late payment.