Entrepreneur has a great piece about extending credit to your customers…
“…And yet, in tough times—which is precisely when business owners begin extending credit to lure those customers reluctant to part with cash—bankruptcies abound, and it can be riskier than ever to accept incremental payments. Just one or two deadbeat customers can push some businesses dangerously close to the dark side, and other business owners can find themselves so consumed with collections, they’re left with little time to run their businesses.“
In September of 2001 (yes, THAT September) one of my companies (Critical Domain) had a number of customers who were on net-30 and net-60 terms… and a huge percentage of them never managed to cough up the dough. We lost over $100,000 in revenue over the course of 2-3 months, and it nearly put us out of business.
It is tough– sometimes extending credit can be the thing that gets you the sale. I’ve seen companies nearly double their monthly sales just by providing financing. However, make sure you’re assuming that a certain percentage won’t pay… and be conservative.
I think for most small businesses (i.e. too small to absorb big losses) should partner with another company to extend credit to their customers. Car dealerships do this, and it works well.