How to evaluate whether to offer credit to your customers

Offering credit — selling on deferred payment terms — is a competitive tool that can grow your revenue, but it's also a risk management decision. The wrong credit decisions result in bad debts, strained working capital, and management distraction that can be more damaging than the revenue gained.

Start with the strategic question: does credit drive incremental revenue or just shift timing? If your competitors all offer 30-day credit and you don't, you're likely losing customers. If credit is expected in your industry, not offering it is a competitive disadvantage. If credit is not the norm in your industry, offering it may not drive the revenue increase you expect.

Build a credit assessment process. For each new customer requesting credit: how long have they been in business? What is their payment reputation in the market (ask around — your suppliers and peers often know who pays reliably)? What is their revenue scale relative to the credit limit you're considering? Do they have references from other suppliers? Can you check their CIBIL commercial score?

Set credit limits, not just credit terms. A customer with 30-day payment terms and no credit limit could run up an uncapped receivable. Define a maximum outstanding at any point — say, 2x their average monthly purchase — and enforce it by pausing supply when the limit is breached.

Review credit performance quarterly. For each credit customer: are they paying within terms? Is their outstanding growing or stable? Has their business situation changed? Adjust credit limits and terms based on actual payment behaviour, not just initial assessment.

First order for new customers: even for customers who will eventually get credit, the first order should be cash-on-delivery or advance payment. This establishes the commercial relationship before extending trust.