There are several factors that influence the ability of a company to extend credit to its customers. These are either internal or external, which also determine the financial risks or profitability that a company may incur where it chooses to offer credit for goods or services.
Market rates greatly affect whether a company is ready to extend credit to its customers. The market is controlled by the consumer interest on goods. Slow economy means that the company may get difficulties in getting loans and where available, the loans are at a high rate. This would discourage a business from issuing credit, as it also means a longer time for repayment of the loan. On the other hand, a well-financed company may issue the credit at high interest rates taking advantage of the slow economy.
Cash flow of the company, which entails the revenue of the business and its expenses, is an example of an internal factor that has a toll on whether a company extends credit or not. For instance, a new company that is yet to make substantial profits, or where the expenses outweigh the losses, would be imprudent to give credit to its customers.
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The most dominant factor today that affects business extending credit to clients is market rates, as they are out of the control of the company and they affect the profitability of the company and, therefore, the ability of a company to loan its clientele.
There are effective methods that can be applied to reduce a bad debt risk. First, there should be effective communication of the amount that the client ought to pay for certain services or goods, which should be followed by a clear invoice and should be well-documented in an agreement or contact. Also, a retainer or deposit by customers of a certain percentage should be mandatory before the goods or services are delivered. This is effective especially for new clients whom the company has never had dealings before and, therefore, does not know of the customers’ trends. Entering into contracts with guarantors to ensure that once the client skips to pay, that the guarantor is ready to pay, or enforce payment from the client.