Thoughts about Offering Credit Facility

As a business owner, there may come a time when you may consider offering a credit facility or pay-later plan to your customers. Perhaps a long-standing client has requested more flexible payment terms, or maybe you want to stay competitive in an industry where delayed payments are the norm. There’s nothing inherently wrong with offering credit. In fact, when managed correctly, it can be a powerful tool for growth and customer retention.

However, credit facilities must be handled with care. Poor management in this area can quickly lead your business into serious financial trouble. What starts as a helpful gesture can easily snowball into cash flow stress and operational chaos.

Let’s break this down clearly so you can make an informed decision.

What Does Offering Credit Really Mean?

When you offer a credit facility you are essentially allowing customers to receive your goods or services now, with the promise that they will pay you later. Until that payment is received, the invoice sits in your accounts as a debtor (or accounts receivable).

The challenge arises when those invoices remain unpaid longer than expected—or worse, indefinitely.

Overdue invoices can create a major disruption to your cash flow, making it difficult to cover your own expenses such as rent, utilities, payroll, taxes and supplier payments. In simple terms, you may be profitable on paper but still struggle to pay your bills when they fall due.

This is why credit management deserves serious attention.

The Pros of Offering a Credit Facility

Before we focus only on the risks, let’s acknowledge that there are advantages to offering credit. when it’s done strategically.

1. Improved Customer Relationships - Flexible payment options can strengthen trust and loyalty, especially with long-standing or high-value clients. Customers may appreciate that you understand their cash flow challenges.

2. Increased Sales Opportunities - Some customers may be more willing to purchase larger or more frequent orders if they are not required to pay upfront. This can help boost revenue in the short term.

3. Competitive Advantage - In certain industries, offering credit is expected. If your competitors provide pay-later options and you don’t, you could lose potential business.

4. Encourages Repeat Business - Customers who feel supported by flexible terms may return more often and recommend your services to others.

Some Cons of Offering a Credit Facility

Now, let’s talk about the other side of the coin—the part that can seriously impact your business if overlooked.

1. Cash Flow Strain - You still need cash to run your business, regardless of whether your customers have paid you. Too many overdue invoices can leave you scrambling to meet your own obligations.

2. Increased Risk of Bad Debts - The longer a debt remains outstanding, the less likely it is to be recovered. Some customers may delay payment indefinitely, or never pay at all.

3. Additional Administrative Work - Offering credit requires consistent monitoring, follow-ups, reminders and documentation. This can become time-consuming if systems are not in place.

4. Emotional Discomfort - Many business owners feel uncomfortable chasing payments or making follow-up calls. This can result in delayed action and worsening arrears.

5. False Sense of Profitability - Seeing high sales numbers can be misleading if those sales are not turning into actual cash in the bank.

Some Contingencies That Should be Considered

If, after careful consideration, you still wish to offer a credit facility, there are several safeguards you should implement to reduce your risk.

1. Clearly Communicate Your Terms and Conditions - Your credit policy should outline payment terms, due dates, penalties for late payment and any interest or fees that may be applied. It is very important to have customers sign this policy to indicate their agreement before any credit is extended.

2. Request a Downpayment - Requiring a deposit before delivering goods or services helps reduce your exposure and confirms the customer’s commitment to paying.

3. Invoice Promptly - Send invoices immediately after goods or services are delivered. Delayed invoicing often leads to delayed payments.

4. Monitor Receivables Consistently - Review your accounts receivable weekly. This allows you to spot overdue accounts early and take action before they spiral out of control.

5. Send Early Payment Reminders - A gentle reminder before the due date can significantly improve on-time payments. Many late payments are simply as a result of forgetfulness.

6. Follow Up on Late Payments - If payment is seven days overdue, send another reminder. At 14 days overdue, make a phone call. The sooner you follow up, the better your chances of recovery.

7. Offer Payment Plans When Necessary - If a customer is experiencing genuine financial difficulty, the introduction of a structured payment plan may be better than no payment at all.

Make Sure Your Business Is Financially Ready

One crucial point that cannot be overlooked: your business must be in a strong financial position before offering credit.

Having sufficient cash reserves can act as a cushion against delayed payments and unexpected shortfalls. Without this buffer, even a few overdue invoices can put serious pressure on your operations.

Here’s something every business owner should remember: the longer a debt remains outstanding, the more likely it is that it will never be recovered.

Offering a credit facility is not a bad business decision—but offering one without proper controls can be a costly mistake. With the implementation of clear policies, consistent monitoring and disciplined follow-up, credit can work for your business instead of against it.

If managing receivables feels overwhelming, that may be a sign that it’s time to put better systems in place—or seek professional support.

Be mindful that your cash flow is the lifeblood of your business, and it deserves to be protected.