Selling on credit means that a business allows its customers to purchase goods or services now and pay for them at a later date. One of the disadvantages of this practice is the risk of bad debts.
Bad debts occur when customers are unable or unwilling to pay for the products or services they have purchased on credit. This can be a significant problem for businesses, as it can result in a loss of revenue and an increase in expenses, such as legal fees and collection costs. Ultimately, bad debts can reduce a business's overall profitability.
In addition to the risk of bad debts, selling on credit can also result in a reduction in turnover. This is because customers may delay making purchases until they are able to pay for them on credit, which can slow down the flow of goods and services through the business. Finally, selling on credit may not necessarily increase liquidity, as the business may need to wait for customers to pay their bills before it can access the cash it needs to pay its own bills and expenses.