Should you offer credit terms to new customers
Decide whether to give a new buyer payment terms by pricing the credit you would be extending and setting the limits before the first order ships.
A new buyer asks for forty five days
The enquiry looks good. The order is larger than your average and the buyer is a recognisable name. Then procurement sends terms of forty five days and the decision arrives with the order attached. Saying no risks the account. Saying yes means you fund their working capital until they choose to pay.
That is the honest framing. Credit terms are a loan you make to a customer at your own cost of capital with no security and no interest. The question is not whether you trust them. It is whether you can afford to lend that amount for that period and what happens if the money arrives ninety days late instead of forty five.
What extending credit costs you
Credit does not buy loyalty and it comes with no protection. Granting terms excludes any guarantee of payment. A purchase order is an instruction to supply and not security against non payment. Unless you buy trade credit insurance separately the entire risk sits with you.
The direct cost has three parts. First the cost of funding the invoice for the credit period at whatever your overdraft or your own idle cash is worth. Second the cost of collection which is real hours of somebody following up. Third expected bad debt which is not zero however carefully you select customers. A useful discipline is to price those three into the quote rather than absorb them. A buyer wanting extended terms is buying a different product from a buyer paying on delivery.
Note also that supplying on credit does not defer your own obligations. Your tax position on a sale and your own payments to suppliers and staff follow their own dates regardless of when the customer pays.
Who should decline politely
Decline if you have no reserve and no sanctioned overdraft. Giving forty five days when you hold two weeks of cash converts a good order into a solvency event. Walk away from that order and say plainly that you supply against advance or on delivery. Some buyers will accept it. The ones who will not were going to be a collections problem anyway.
Decline if the single order would make one customer your largest debtor by a wide margin. Concentration is the risk that actually damages small businesses. The biggest debtor is the one you are least willing to chase hard and they know it.
Decline for a newly incorporated buyer with no filings and no trading history, and for any buyer who refuses to put terms in writing. A buyer unwilling to sign a two page supply term sheet is telling you something useful at no cost.
How to extend credit properly
Do the checks before quoting rather than after shipping. Verify the legal name and registration details. For a company look at whether statutory filings are current. Check whether GST returns appear to be filed regularly because an irregular filer often has a cash problem already. Ask for two trade references from suppliers in your own category and actually call them. Commercial credit reports are available for businesses in India and are worth their cost on a large first order.
Then structure the first transaction so that it limits exposure. Take an advance on order one. Set a credit limit as a rupee figure and not as a feeling. Supply in stages so an unpaid first instalment stops the second. Put payment terms, the delay consequence and the governing jurisdiction in writing and have the buyer accept them before despatch.
One statutory point matters here. Indian law sets expectations about how quickly buyers must settle dues to registered micro and small enterprises and attaches consequences to delay beyond that period. If you are registered as such this changes your position materially. The provisions are specific and a qualified professional should confirm how they apply to you before you rely on them.
How to tell whether your credit policy is working
Track days sales outstanding and the share of receivables that has gone past agreed terms. Read them together. A stable average hides a situation where most customers pay early and two large accounts are drifting. Bad debt written off as a share of revenue completes the picture over a longer horizon.
Revenue booked flatters and so does the order book. Both count invoices that may never be collected. An order shipped on credit is not a sale until the money clears and treating it as one makes a growing business feel safer than it is.
The common mistake
The common mistake is granting terms once to win an account and then never reviewing them. No limit gets set so exposure grows with every order. By the time payment slows the outstanding balance is large enough that stopping supply feels worse than continuing and the business keeps delivering to protect a debt it cannot collect.
That is how a profitable customer becomes the reason a company fails. The fix is unglamorous. Write the limit down. Review it quarterly. Stop supply on breach the first time and not the fourth.
This guide explains how something works. It is not legal, tax or financial advice, and rules change. Confirm anything regulatory with a qualified professional before you act on it.