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In general, businesses are in a stronger financial position when they have more cash-on-hand. Having more cash can also reduce many operational uncertainties for your business.
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, you can continue to purchase supplies and/or raw materials and you can continue servicing your loans.
For growing businesses, the cash in your bank account gives you the confidence that you are able to invest in growth without shouldering higher business risk.
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.
By enabling your corporate customers to improve their cash flow, your business is playing an integral role in strengthening their businesses. One way to do this is by offering your customers longer credit terms and there are benefits to you as well.
While this improves their cash flow, it has a direct inverse relationship on your own cash flow – you will be slower at collecting your receivables and potentially run a greater risk of non-payment.
At the end of the day, you need to weigh the payoffs. Here are four ways your business stands 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 may be able to negotiate a better price for your products or services if you can simply wait a little longer before your customers pay your bill. A higher price translates 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 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 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 have to press other suppliers – which will not be ideal for them.
By becoming such a close and valued partner, you can also develop deeper customer loyalty as well as 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 your own suppliers. This can boost your bargaining power when talking to suppliers of your own.
You Do Not Actually Want To Strain Your Own Business Cash Flow
You can enjoy both tangible and intangible business gains from being able to offer longer credit terms to your customers. Simultaneously, you do not want to sabotage your own business.
Besides hurting your own business cash flow with a lengthy credit policy, you are also raising risk of default from your customers. Your reputation for providing credit also cuts both ways. You are able to signal to good customers that you trust them, but you are effectively signalling to every other customer that you can provide a long credit term. 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 monitor your accounts receivables, forecast your own cash flows and subsequently invoice to collect your money.
Ideally, a bigger business and better profitability should cover the additional administrative cost of providing longer credit terms. To ensure your own business has healthy cash flow and help you better manage some of the risks introduced by providing longer credit terms, it is common to explore trade financing options with your bank to mitigate this.
For example, you can use Invoice Financing from a bank like OCBC to protect your own cashflow, 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 an 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, which should be in line with 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 make a late payment.
Need Financing Support During This Period?
Enjoy fast access to funds and receive your loan approval status instantly when you apply online with OCBC.
For SMEs that are just six months into operations, secure up to S$100,000 with the OCBC Business First Loan . If your SME is above two years old, secure up to S$700,000 with the OCBC Business Term Loan – good for funding business operations or expansion. Terms and conditions apply.
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