Should I give credit to customers?

Sometimes clients put you in awkward positions when they ask for credit. What's the best way to handle it?

In a lot of countries giving credit in business is rare. In other countries it's expected and if you don't give credit, you have the risk of not being chosen for the job.

Is that a threat or reality?

It's hard to know whether a client actually means it when they say they won't work with you if you don't give credit, and calling their bluff could be risky.

What does "giving credit" actually mean?

When a client asks for credit, they're asking you to deliver now and get paid later. Maybe it's 30 days. Maybe it's 60. Maybe they'd like to pay in instalments. Whatever the arrangement, the result is the same - you've done the work, and the money isn't in your account yet.

That gap between delivering and getting paid is where a lot of small businesses quietly struggle and if you end up giving credit to a lot of customers, it could strain your business - and in some cases cause it to cease trading. 

Why do clients ask for credit?

Sometimes it's a cash flow issue on their end. They've got the money, just not right now.

Sometimes it's how their business operates. Any purchases have to go through their accounting department, you need to be set up as a supplier and they need to give you a purchase order. The larger the company the more processes they have. And once you're set up, after sending your invoice, you may have to wait 30, 60, 90 days or longer to get paid.

Some larger clients know that smaller suppliers need the work, and stretching payment terms is one way to use that leverage. The longer they keep money in their bank account, the more interest they'll earn also. 

If a client is in a financial problem, you'll never know, but always try and read between the lines on how their business is going. 

The real cost of giving credit

On paper, giving credit sounds like a reasonable business gesture. In practice, it means you're financing your client's business with your own money and risking crippling your own cashflow. 

Think about it. If you've paid for materials, your own time and staff time - and you've delivered the goods or services. Now waiting 30, 45, maybe 90 days to get paid isn't ideal.  anything in return. Meanwhile, your own bills don't wait.

This is how profitable businesses run into cash flow problems. Not because they're not making money it's because the money they've earned hasn't arrived yet.

So should you do it?

There's no universal answer, but there are better questions to ask yourself:

Is this client worth it?

If it's a regular client and they've always been reliable in paying on time, then to keep your relationship good, it's fine to give credit. However, the minute you feel that they're slipping, don't feel shy to ask for payment. If they ever run into financial problems you could be left with a bad debt. Happens more often than you think. 

A new client you barely know asking for 60-day credit before they've placed a single order? That's a different calculation.

Can you afford to wait?

If you have enough cashflow, other clients are paying when they promised and a delayed payment isn't going to be make or break, then giving credit is fine. But just keep on top of it. 

Don't keep it informal

If you're giving credit, make sure it's clear in your terms and conditions and stated in your invoice when you expect payment, and if they don't pay in time, they'll incur interest or the debt will be passed to a collection agency. 

How to handle the conversation

If a client asks for credit and you'd rather not give it, you don't have to be blunt. There are ways to handle it that keep the relationship intact.

You could simply ask for a 25% or 50% deposit and ask for milestone payments during the course of the project. This isn't unusual and if they really are committed to doing work with you, they'll be respecful enough to agree. 

If your job includes buying supplies, make sure you cover the cost for that and tell them materials need to be paid at the time of order. This is perfectly reasonable. 

The bluff problem

That uncomfortable moment - you've given them your payment terms and they're still refusing to give a deposit or pay on completion. 

If it's a publicly listed company, a goverment organisation or a large multi-national, the chance of them closing up is low. The chance of them defaulting is low - unless there's an issue with the delivery. The only thing you'd have to be comfortable with is that you'll get paid but it may take time. 

Smaller companies, or those you don't have a working relationship with - you'll need to make a judegement call. If it's just your labour for 1-2 days, then the risk is lower. If it's staff costs, material costs etc, then you need to think twice. 

Here's one way you'll solve most of the challenges.

What a lot of people don't realise, is that most individuals and departments in large companies have company credit cards. Unless the transaction value is huge, they can use it for most needs. Staff in these companies don't actually like going through their accounts department to get you listed as a supplier as it could take days and they want you to start working asap. 

What they need to feel confident is that you're a legitamate business and you'll deliver. 

With Payment Link, you can send customers a branded payment link by email or any messaging app. The email comes through with your brand logos, your details, and a breakdown of the goods/services they're paying for. Even a tax/vat breakdown if applicable. They click through to the payment page, which is also branded and simply checkout using credit/debit card, Apply Pay or Google Pay. Once payment is completed they'll receive a link to download a PDF invoice. 

This takes no more than 6 minutes end to end to complete. 

Your payment is guaranteed, the client is over the moon as you've made it so easy for them to do business with you - and they're more likely to use you in future. 

All the stress of awkward conversations, credit terms, chasing payments - all gone. That's what we call smart business.