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Deciding Whether Your Business Should Offer Store Credit

Many businesses decide to sell to customers on direct credit (or store credit), meaning credit offered by the business and not through a bank or credit card provider. This approach offers more flexibility in the type of terms you can offer your customers, and you don’t have to pay bank fees.

If you accept a customer’s bank-issued credit card for a sale and the customer doesn’t pay the bill, you get your money, and the bank is responsible for collecting from the customer and takes the loss if he or she doesn’t pay. That’s not the case if you decide to offer credit to your customers directly. If a customer doesn’t pay, your business takes the loss.

The decision to set up your own store credit system may depend on what your competition is doing. For example, if you run an office supply store and all other office supply stores allow store credit to make it easier for their customers to get supplies, you probably need to offer store credit to stay competitive.

If you want to allow your customers to buy on store credit, the first thing you need to do is set up some ground rules. You have to decide

  • How you plan to check a customer’s credit history

  • What the customer’s income level needs to be to be approved for credit

  • How long you give the customer to pay the bill before charging interest or late fees

The harder you make it to get store credit and the stricter you make the bill-paying rules, the less chance you have of a taking a loss. However, you may lose customers to a competitor with lighter credit rules.

For example, you may require a minimum income level of $50,000 and make customers pay in 30 days if they want to avoid late fees or interest charges. Your sales staff reports that these rules are too rigid because your direct competitor down the street allows credit on a minimum income level of $30,000 and gives customers 60 days to pay before late fees and interest charges.

Now you have to decide whether you want to change your credit rules to match that of the competition. But, if you do lower your credit standards to match your competitor, you could end up more customers who can’t pay on time or at all because you’ve qualified customers for credit at lower income levels and given them more time to pay.

If you loosen your qualification criteria and bill-paying requirements for a store credit card, you have to carefully monitor your customer accounts to be sure they’re not falling behind. The key risk you face is selling product for which you’re never paid.

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