Every now and then you may have the opportunity to make a huge sale. This may be from an established customer who is trying to take their business to the next level or from a new customer who decided to switch to your company. Either way this is great news, but taking a step back and doing your due diligence before extending a large amount of credit can save you major headaches down the line.
Long time Customers vs. New Customers
The danger associated with long time customers is substantially less, but a dramatic increase in purchase volume should not go unchecked. With established customers you have the advantage of possibly years of credit history, personal relationships, business insights, and hopefully a good amount of trust. With this being said, extending a large amount of credit just because they have always paid on time is not a good enough reason. If their average monthly credit allowance is typically 5-10 thousand and they are now asking for 5, or even 10, times that amount they have entered into whole different ball game.
The less history you have with a customer, the more dangerous it is to extend large amount of credit. With that being said, extending credit is never a certain game and sometimes you have to take risk in order to grow. Bringing in a huge new source of revenue can be game changing, but at the same time can also kill your bottom line if it goes poorly.
Regardless of the customer, extending large amount of credit should not be done lightly. It opens your company up to liability down the line and can seriously hurt your bottom line if not done correctly. The lure of a huge sale can be tempting, but in some cases it may be smarter to build your business with smaller, more manageable
How to Extend Credit
The best thing you can do when confronted with a possible huge sale is not forget the basics. You should still go through the same process you always would. This means taking an honest look at the financials, talking to your customer about their plans and goals, and many other tried and true methods of assessing credit worthiness. If you do not already have a rigorous system in place to extend credit or would like to learn more, here is our ebook on how to extend business credit.