Surreal Entrepreneur

Let’s discuss ways that businesses offer credit:

Some will allow for purchase orders, they deliver goods and bill the customer at the end of the month

There are, of course, checks and credit cards

Payment plans and Layaway programs

Title loans and Pawning

These are just a few of the different ways that business will, in good faith, allow the customer to claim ownership of an item or grant the person service with the understanding that money will be paid back in due time.

Lets delve into three of these ways a little further. Firstly, lines of credit are under the same kind of terms as what you think of in the traditional sense of a tab. “Put it on my tab”, this is a flexible agreement between customer and business that the customer agrees to pay down this debt over a period of time that is comfortable and as timely as possible. This is not for the newly acquainted relationship. Please revisit my last post concerning relationships and reducing risk when offering credit.

Secondly, Equity credit. This is a more widely used form of extending credit to customers. In this way, you hold collateral against the money that has been borrowed. The most popular forms of collateral are car titles, which can amply cover the risk of loaning out money or products, because if the person who borrows money or products on credit does not pay, then you get to keep the item that they have left as collateral.

Lastly, Special agreements, concerning credit, are perfect for relationships between to well associated parties. If you trust someone enough you can offer them credit at your store without defined terms and timelines. This is a very difficult relationship to monitor and money might not come as regularly as one party expects, however this is the only type of relationship that is expected between two very well acquainted parties.

While looking at the ways you can offer credit to your customers, it is important to remember that there are always people that are going to try to use your systems against you. Work hard to keep as much leverage as possible while still focusing on customer satisfaction and service. If someone has to ask for credit, it might be because they are going to order more products and services than they can immediately pay off, or it is because they are in a tight monetary spot. Either way you are assuming some risk. work to minimize that risk but don’t count out credit.

Credit is risk. Now that we have established that, a business owner needs to know that this isn’t a Utopian world. There are people that will take advantage of you and take your money as well. Not everyone is a shark, but we have to prepare for customers to have negative intentions so we can treat them as if they were Mother Theresa.

How do we limit risk when considering allowing our store to offer credit?

Firstly, I have had positive and negative experience with Purchase Orders. While some people have been incredibly efficient and responsive with filing the purchase orders with their companies in order to have the money set aside and ready once billed, other organizations and people were lackadaisical and this help up due money for months. This process should only be available to customers that not only have demonstrated the necessity for a long term partnership to show dedication to the relationship, but also have demonstrated the organization and will to get things done efficiently. This should only be extended with a very air-tight contract along with a storied relationship.
Also you as a business owner need to verify that the person you are extending credit to is tied to the region or area that you are in as well. Purchase orders are feasible between separate parties, but being able to knock on someone’s office door and ask for the status of the transaction is more powerful than a re-sent e-mail with a bill.

Lastly it might be beneficial, if you are in the position to do such, to hold the keys to the service, this doesn’t necessarily mean physically. For example, Pandora radio has a subscription service that I pay for yearly. They know that I’ve paid for an entire year, but they extend out a few days past the year that I’ve purchased hoping that I have the intention of purchasing another year. A lot of products and services have the ability for the manufacturer to access the product (online dashboard, computer, tablet, phone, etc) remotely, so the customer’s incentive to pay their debt is the daunting understanding that they could completely lose the use of that product if they don’t pay.

I would like to stress that relationships are the first thing to focus on when deciding to extend credit to a customers. If you have a reason to trust someone, they might just have a reason to pay you back.

I have become increasingly more aware of the necessity for accessibility in this current economy. Especially when a business revolves around non-essential items, a store owner must do everything they can to be the easiest purchase possible in order to retain a customer. To relate this to real world situations let’s take a journey to the last time you were in a small town feeling store. There were wood floors, lots of trinkets and knickknacks everywhere. The place smelled like a melange of different sweet candles and scents trying to emulate a good memory. You pick up a small children’s toy made of wood, thinking that your friends child might enjoy it, as you walk up to the register line you see in bold letters a sign that says “CASH ONLY”. You put the toy down and slowly but confidently walk out the door.

This has happened to me several times. I’m not necessarily a person who buys on whim but I also don’t have cash on me, prepared to the cent, to purchase a specific item. I use mainly a debit card and credit cards to make my monthly purchases. So when a business doesn’t allow me to use my preferred method of payment, I’ll most likely walk, especially if I don’t really need the item.

That being said, there are several topics that deter businesses from wanting to participate in taking cards. Firstly, there is a fee associated with each transaction. Most companies charge anywhere from 2.5% to 3.5% to use their card charging services. There have been some revolutionary advances in these technologies including the easily accessible and incredibly affordable hardware that simply plugs into your favorite handheld media device and instantly becomes a card reader complete with signature. But the terms of agreement can be confusing and one can get trapped into contracts and lengthy agreements. So read the fine print when choosing a card processing service. This is the largest deterrent for small businesses and I would only suggest a product based store that moves enough volume to not be affected by a 3% shot to margin to embark on getting credit card receiving capabilities.

Also this means the money isn’t instantly in the businesses account. It requires a small holding/processing window and a completion of some online claiming to receive the money from accounts.

The last downside is that you have to make sure that the records that you keep for these transactions are very (I mean overly) secured. This is the difference between sinking and swimming. Imagine if a bored hacker was able to acquire all the information of your customers, that could be a reputation and finance disaster.

Once again though, we need to focus on convenience. If someone else is selling the same thing as you, and they don’t have cash in hand but your competitor has the capability to take cards… who do you think will make the sale?