Customer credit: Should I extend credit, and will I be repaid if I do?

13 October 2023

  • Customer credit is the credit you extend to your customers. It allows them to pay days, weeks or even months after receiving a product, service or invoice.
  • Extending lines of credit can help you attract new customers, build relationships, and maintain a competitive edge.
  • Offering credit to your customers carries risks. It can lead to both cash flow challenges and increased administration costs.

Extending lines of customer credit is increasingly common across the UK. From high street retailers offering Buy Now, Pay Later deals to professional service providers offering thirty-day payment terms on their invoices, businesses of all sizes and industries now provide their customers with a range of deferred, delayed, and staggered payment options.

But why is customer credit so popular, and how can you ensure you’re repaid if you offer credit?

Why is customer credit so popular?

While it might seem natural to ask for payment upfront, there are several benefits to extending customer credit:

  • It builds and maintains relationships: By showing customers that you trust them, you start to form a bond.
  • It helps expand your market: Customer credit is an attractive proposition, helping you appeal to a broader audience.
  • It enhances your competitiveness: If you offer customer credit, but your competitors don’t, you can compete with more favourable payment terms.
  • It promotes loyalty: All these factors combine over time to make your customers more likely to return or refer your business to others.

What are the risks of customer credit?

Of course, there are significant risks to extending customer credit that need to be weighed against the benefits before you make a decision. They include:

  • The risk of defaulting: There’s a real risk customers may not repay your credit, turning a sale into a loss of materials, time and money.
  • Cash flow challenges: Delayed payments add a layer of complexity to your cash flow predictions, especially if you can’t be 100% certain a payment will be made on time.
  • Administrative challenges: Managing credit and collections takes time. You’ll need to hire and pay for credit control staff to extend customer credit.

How can you mitigate against the risks of customer credit and ensure you get paid?

There are real risks and challenges in extending credit to your customers. It’s understandable if they cause some hesitancy. But these risks can be mitigated, and the challenges overcome.

First, you need to know who you are lending to. Before offering customer credit, you should analyse their credit history and assess their financial stability. Researching past payment behaviour also helps you understand whether a customer can be relied on to pay their debts.

Before offering customer credit options, you should ensure your business is prepared. This includes having:

  • Healthy cash flow: Means one or two late or non-payers won't cause significant damage.
  • A well-documented credit policy: Covers how much you’re comfortable lending, who to, and under what circumstances.

What are the options to help protect your business?

Investing in an insurance policy, such as Trade Credit Insurance (TCI) from Allianz Trade, adds a layer of security and financial protection.

TCI protects B2B credit terms by insuring your trade receivables. We provide cover if you offer a customer credit and they fail to pay because of insolvency, inability to pay, or an outright refusal.

We can also deliver insights into your customers. Our in-depth analysis connects you to the latest credit risk data to help you understand your customers and optimise your entire customer credit management process. This will help you reduce risks by making informed choices on who to extend credit to and what limits to put in place.

For a free credit insurance consultation call our UK team, 09:00-17:00 Mon-Fri.