Should you extend credit?

August 24th, 2015 / By: / Business, Management

Fabricators stress caution when extending credit to customers.

On the surface, it sure seems like a slam-dunk decision for a marine fabrication shop to not extend credit to customers. “Let’s see, when you write off thousands and thousands of dollars—maybe even $100,000 over the 30-year life of the company—you start to think about giving anybody credit,” says Mike Erickson, owner of Canvas Designers in Riviera Beach, Fla. “That’s why one of the things we require is a 50-percent deposit. We don’t really extend credit.”

As much as some companies snarl at the suggestion of extending credit, they all do it (in some form) all the time—and for good reasons, such as:

  • It’s a competitive market, and extending credit might help you land or keep a key customer.
  • The credit option decreases the distraction of price; customers are freer to follow their impulses and focus on the benefits of the product.
  • Extending credit can enhance customer relations and has the potential to generate more sales and loyalty.

Erickson says what he does in terms of extending credit is a reward for his best customers. “They’re a business, and they don’t just get out their personal checkbook and write you a check. The project manager at Rybovich isn’t going to cut you a check. He’s going to go through a corporate process that might take 10 or 15 days. That’s the amount of extension I’m giving them.”

Small shops especially should swear off extending credit.

“Say there’s a $10,000 order,” says Carie Bores, director of sales and customer service at Great Lakes Boat Tops Co. in Vonore, Tenn. “This shop’s got $6,500 worth of material and labor to pay for, and then they’ve got to wait 60 days or whatever to recoup their money. That’s a lot for a small company to handle with cash flow.”

Bores says Great Lakes Boat Tops, which has 130 employees, offers incentives to customers bringing a large amount of business. “We give a 2-percent discount if they pay before 30 days,” she says. “The only time we would extend credit is if there were a large stocking order somebody wanted to place in the slow season; this would help with production.”

Both Bores and Erickson favor credit card use, which lets credit card companies assume the hassles, risks and rewards of extending credit. “That 1-percent or 2-percent charge from the credit card company is not even worth discussing,” Erickson says. “If I were to do it the other way and extend credit to customers, I guarantee it would cost me a lot more than that.”

While there are exceptions, the bottom-line rule according to Bores and Erickson is: Say yes to credit cards and letting your best, long-standing customers pay according to their billing cycles, but say no to extending credit.

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