There are a number of external and internal factors that influence credit policy and decision making when providing a good or service. Credit policies are establish to minimize a company’s risk while maximizing its profits. Internal factors are the business’s financial condition or cash flows, company profits, and the size of the business. However, companies must have guidelines and terms in place. Fitsmallbusiness.com states, “Your credit policy should clearly address payments terms, penalties, interest for late payments and the collection process for delinquent invoices.” (C. Shelton, 2019) Customers should understand what their expectations are and how it will affect their future credit with the company. If credit policies are too lenient, it may cause future issues with collections or company case flows.
External factors are customer credit history, position of the economy, changes in laws and competition of other companies. Companies that offer credit to customers must be aware of the economic situations such as recessions or changes in tax laws. Businesses that offer credit to customers also gain an advantage over competitors, customer satisfaction and loyalty. One of the most important external factors is customer credit history. A customer’s payment and credit history gives the company a general idea of whether that customer will make good on its returns. Although it may be risk, granting credit to customers can provide future cash flow and profit, so a company with the ability to extend credit to its customers with feasible credit policies is important.
Business extending credit to its customers is a great thing for a company. It has many benefits from creating customer loyalty and boosting revenue and creating a great reputation for the company. There are many internal and external factors that come into play when a company extends credit to consumers providing a good or a service. The internal factors include the level of unsold inventory, the company will have to determine the credit risk it can handle, the credit qualifications of the consumer, and the credit terms that will be offered to the customers. The external factors include the type of customers the company is granting the credit to, the economic condition of the current market, the level of competition in the same market and the risk of having bad debt from consumers.
The factor that I think is most important in extending consumers’ credit is the effects of the cash flow into the business. When extending credit you will have some customers who will pay on time, some may be a little late, and some may become serious problems. All of this will affect the cash flow of the business sometimes not in a positive way. Working in the collections field for a bank that extends credit as a way business there are many positive and negative outcomes because if the consumer is unable to pay it can put the business in the red rather than generating a profit