A lot of people are starting businesses in Zimbabwe. The chances of entering a market that is not somewhat crowded if not saturated are slim to none. And that’s not considering the hundreds or thousands of others who will try to make an entry into the same crowded at the same time as you do. One of the methods people look to encourage customers to choose them is offering credit sales. Sometimes you don’t even have a choice as a seller in the market with buyers holding too much power. Whatever the case is credit sales need to be approached with care and there have been a few changes in the Zimbabwean landscape that some will be able to take advantage of. Let’s look at ways to manage credit sales as a small business.
This is an underrated approach but if used correctly it can save your business from the trap of bad debts. Do not extend credit to customers you have not dealt with before. Even if someone vouches for their creditworthiness unless they are vouching as surety you have absolutely no business extending credit to customers you have not dealt with before. By dealing on a cash first basis you gain an appreciation of the customer’s behaviour, average spend and frequency of spend. You can use this information when eventually extending credit to the customer to work out just how much credit to extend to them. Here’s a tip, if the customer asks for more credit than the usual invoice size it’s probably a bad idea to extend credit.
Even when customers have proven themself to be genuine continuous customers you might still want some degree of commitment from them when you offer credit. Asking for a partial deposit upfront helps with this. This works very well for businesses offering services as well. A cleaning service or website developer can ask for a percentage of the invoice upfront. What percentage should you ask for? There is no one size fits all here as you can hear anything from 55 to 70%. What you should look at to decide this includes the market, the nature of business, costs, the customer and if you are borrowing to finance things the cost of credit as well.
Another thing to consider is order finance. You can look at a formal order finance arrangement or create your own by gaining access to credit that you can use to finance orders. The key is to make sure that your credit period does not extend beyond the finance period and that you make up for the cost of finance. So if you manage to get credit or order finance that lasts for 90 days and charges you 5% interest in that period you should not extend credit further than the 90 days and make sure you are compensated for the 5% cost of finance. Order finance allows you to provide credit to customers without jeopardising your liquidity or solvency position.
Another way to provide credit sales to customers is to engage in invoice factoring. The Zimbabwe Receivables Market offers invoice factoring though this may not be available to everyone. Invoice factoring is an arrangement where an institution known as a factor buys outstanding invoices from holders. So if you make a credit sale of $100 due to be paid in 30 days a factor would pay you say $95 for the invoice today and receive the $100 in 30 days. These are formal arrangements that can get complicated but the receivables exchange is changing that for those businesses which meet their requirements.
Working Capital financing
Working capital finance isn’t very different from the DIY order finance arrangement concept we discussed earlier. For small businesses, it is the easiest type of finance to attract after order finance. Lenders are understandably more open to the idea of financing an operation that is already running and needs a little help staying liquid than being the rocket fuel required to get a business off the ground. The same principles apply here as with the DIY order finance, you need to be mindful of the cost of credit in your calculations and make sure that the business you generate sustains the cost of finance.
You can use one, all or any combination of these ideas and see how you can configure things to enable you to allow your customers credit sales. The idea here is to increase your bottom line sales figure and if extending credit won’t do this it may not be worth the cost.