As consumers, we are educated to pay down debt quickly, spend within our means and buy what we can afford. Commercial credit can assist a small business achieve growth and success which may otherwise be unattainable.
Australian small business owners use less finance in their businesses relative to their American and European counterparts. This is due to both a relatively conservative attitude on the part of the Australian business owner and also the terms on which banks typically provide traditional credit.
Just as the word ‘expansion’ does not only mean larger physical premises, the term ‘credit’ in this context does not necessarily mean traditional bank debt.
There are a number of non-traditional forms of credit which can assist a small business achieve its expansion plans without the business owner taking on undue levels of risk or having to put up their house as security.
Australia has witnessed phenomenal growth in point-of-sale finance over the last 10 years. The ‘buy-now pay later’ concept is fully entrenched in the behavioural patterns of both business and private customers. Large retailers and insurance companies are classic examples of how the use of pay-by-instalment credit can assist in the sales process.
Why do they do it? Businesses offer instalment payment terms not because they want to become lenders to their customers but rather the delivery or access to credit at the point of sale will help the business sell more of their core products and services.
And it works.
It is very common for TV and other commercial advertising campaigns to focus solely on the availability of instalment payment terms to attract the customer to the business.
So how can a small business do this? The key is to use a credit facility and not your own capital. Businesses need to stick to their core business. Use your capital for inventory management and other business expenses and third party capital for credit management.
Offering customers instalments or extended payment terms with your own capital may help sales but will hurt your cashflow if there are delayed payments or defaults.
The key is to have a credit facility which enables the credit terms to be offered to the customer and possibly even transfer the risk of payment default to the finance provider.
There are a number of ways credit, when used wisely, can help the small business achieve its expansion plans:
- Sales focus: Providing customers with pay-by-instalment terms can provide a significant point of difference in your sales efforts.
- Change the focus from the price to the affordability of the instalment payments.
- Customer benefits: Providing longer instalment payment terms to your customers provides them with a working capital benefit that can translate into larger orders.
- Customers could hold more inventory for a given monthly outlay.
- Cash flow management: Nearly all businesses operating B2B models need to provide payment terms to customers. If not managed, those payment terms can cause significant cash flow pressure. Having a credit facility to accelerate payment of customer invoices can alleviate that pressure.
Brad Prout is the CEO and founder of First Class Capital.