Perfect Terms – Ultimate Guide to Extending Credit without Breaking the Bank

If you are giving net terms (i.e. selling on credit) to your customers, you know they are treating you like a bank. They buy goods or services from you, and they end up paying you months later. You are paying others to run your business (suppliers, utilities, lease) and you are letting your customers use your goods and services without paying anything upfront. You are basically giving your customers free working capital.

Extending credit is probably helping your sales, but what about your net earnings? Are you making any profit (and we are not talking about income statement profit here; we are talking about hard cash)? If your customers are treating you like a bank, you’d better be prepared to act like one. If you want to stay profitable while extending credit, you definitely need to use some of the effective tools that banks and other lenders use to extend credit.

We know it is difficult to deal with receivables and act like a lender. It is not your core business. If you really hate and do not want to deal with receivables management at all, you can outsource your entire receivables process to companies like Blue Tarp or trade credit insurance companies such as Euler Hermes. But they are very expensive solutions for many small businesses.

In this article, we compiled some of the best techniques used by other creditors and made them available to you. Below you will find tips on 5 crucial areas of receivables management that will help you extend net terms in a more professional, less risky way.


Unless the customer is established, always start with Collect-on-Delivery (COD). If you are dealing with a new customer who never had a business relationship with you, it is important to start with caution. Showing your generous side might end up hurting you a lot. And don’t worry about seeming too anal: if they ever did business with others, they will know that you are just trying to run your business without giving away free cash. It makes sense to establish a track-record with a new customer before offering any credit terms. If they try to push you to extend credit, tell them you will give plenty of credit after they establish a business relationship.

Starting with COD or a very low credit limit will keep your risk exposure in check while allowing you to get to know your customer more.


No matter what happens, have your customers fill out a trade credit application form. Getting as much information as possible will tremendously help you if that account starts going sour. Make your new customers fill out the application the first time they ask for net terms. Tell your existing customers you are updating your credit files and ask them to send you their trade credit information. If you don’t want to send them the same application form, send them an “existing customer info update sheet”.

Putting together a credit application is very easy. You can do a simple Google search to get a sample trade credit application. See sample trade credit applications in manufacturing, construction, wholesale and retail here.

Recently, many companies (like Dell) began automating their entire trade credit process. If you receive a high number of applications every week, you also may want to set up a similar system.


Before you decide on how much credit to give your customer, make sure you do an initial due diligence check on that customer. Check the trade references. Find out the range of trade terms your customer gets from other suppliers. The credit limit should be based on:
A) Your customer’s overall credit standing (You can check reports from Dun & Bradstreet, Experian or Equifax)
B) Your overall risk exposure (always track your open positions and aged trial balances. If you have an accounting system (such as Quickbooks, Sage or Peachtree) you probably can download it with a single click.
C) Your customer’s historical payment performance (how well they have been paying you)

Resist the urge to extend existing customers more just because they have been in business longer. Statistically, existing customers are just as likely to stop paying as new customers.

If you do not have enough information on a particular person or business, you might be better off doing an investigative research by using services such as Kroll. Especially for big ticket sales that may have an impact on your risk exposure, it might be worth the extra cost.


There are several red flags you can pick up before you realize your customer is in delinquency. Especially for customers that constitute a majority of your overall sales, monitoring their financial risk will help you make better credit decisions. Finding out about liens, judgments, suits or UCC filings of your customers, you can save a lot of time and money during your receivables management process. It may be difficult to monitor all your customer portfolio, but you should at least check your major accounts every once in a while. (Check out Cortera Pulse).


It’s a lot easier to set the expectations with new customers than with the old ones. So, the earlier you put up a credit policy in place, the easier it will be to manage receivables. Your policy does not need to be complicated or harsh, but it needs to be clearly defined. For example, let your customers know what your net terms are, what kind of late penalty you charge, when you will contact them about late accounts. Then stick to your word. Whenever someone is late, resist the urge to give them a rain check for this time. Follow your standard procedure.

Clear communication is a critical component of receivables management. Make sure you quickly follow-up on your late accounts. Your customers should know that you monitor your books very closely. If your customers think they are flying under the radar, they will gladly keep stretching their payments.

Always remember, by extending credit you are acting like a lender. If you can get paid in a shorter period of time, you can extend more credit, thus sell more. Unless you put those practices in place, it will always be difficult to increase your ability to extend more credit without increasing your risk.

This entry was posted in How To and tagged , , , , , , . Bookmark the permalink.

2 Responses to Perfect Terms – Ultimate Guide to Extending Credit without Breaking the Bank

  1. Pingback: Credit Bureaus: Friend or Foe? | Funding Gates

  2. Pingback: Business Credit Bureaus: Friend or Foe?Funding Gates

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s