Extend Credit and Increase Capital

Isaiah Berlin once tried to divide all thinkers into two categories.  In so doing, Berlin quoted a Greek poet by the name of Archilochus.  Archilochus wrote, “The fox knows many things, but the hedgehog knows one big thing”.  By this Berlin was trying to say that all thinkers could be understood in terms of being placed in one of two categories:  those who saw the world through a single defining idea (Plato, Pascal, Hegel) and those who drew on a wide variety of experiences, and did not see the world in terms of one overriding single idea (Aristotle, Shakespeare, Balzac).  However, in understanding Tolstoy’s view of history as expressed in “War and Peace”, Berlin asserts that Tolstoy is by his very nature a fox; but, a hedgehog by his convictions.

As Berlin could see that Tolstoy was both a fox and a hedgehog, a wise entrepreneur can see that his/her consumer contracts can be utilized both to extend credit to customers, while at the same time the same consumer receivable can be sold to create immediate capital. The reason this is noteworthy is that sometimes business owners forget that a sale is not truly a sale until all the money from the sale of a product or service is collected in full.

For the period of time in which credit is extended to your customer you become the customer’s lender and the customer becomes your borrower.  What can be easily lost sight of is that during the period of time in which credit is extended to you customer, you lose the value of your own capital which is tied up in the transaction. There is a very real sense in which you do not have control of your own money during the time in which you are waiting for your customer to pay you.  You can only anticipate and hope to be paid in a timely fashion.  If your customer had paid cash, you could have put the capital back to work immediately, rather than waiting to be paid.  Worst still is a when your customer pays late, resulting in your costs to increase still further.

Everyone knows that there is no such thing as a free lunch.  Someone has to pay for the cost of the extension of credit to any given customer.  Either you pay for the extension of credit, resulting in decreased profits, or your other customers pay for the extension of  credit through higher prices, or some combination of the two.  The entrepreneur who ignores this hidden cost of credit does so at their own economic peril  Late payment of consumer receivables can spell disaster in a marginal company.

If you choose to sell your consumer contracts, in so doing you can not only provide financing for your customers, but at the same time you can enhance your cash flow.  You know your business better than anyone and are the best judge of whether or not this can result in greater profits for you.  

Contact Us for more information on how you can extend credit to your customer and increase capital simultaneously.