Extending payment terms to a customer is, functionally, making them a short-term loan — you're providing goods or services now in exchange for a promise to pay later. Most small businesses back into this decision customer by customer, with no consistent standard, which is exactly how a business ends up with cash tied up in unpaid invoices from customers who never should have gotten terms in the first place.
Decide Who Even Gets Considered for Terms
Not every customer needs to go through a credit evaluation. For a retail or consumer-facing business collecting payment at the point of sale, this issue barely exists. It becomes relevant once a business sells to other businesses, government agencies, or institutional customers that routinely expect net payment terms as a condition of doing business. Decide upfront which customer segments will be offered terms at all, rather than defaulting to yes whenever a customer asks.
Build a Simple Credit Application
Before extending terms to a new business customer, collect basic information: business name and legal entity, how long they've been operating, a few trade references from other suppliers they currently pay, and for larger extensions, a business credit report through a service like Dun & Bradstreet or Experian Business. This doesn't need to be elaborate for a small business — a one-page application is often enough — but having any consistent process at all is a major improvement over deciding case by case based on how a conversation went.
Set Credit Limits, Not Just Terms
Payment terms (net 30, net 60) and credit limits (the maximum outstanding balance a customer can carry) are two different decisions. A new or smaller customer might reasonably get net 30 terms but a modest credit limit, with the limit reviewed and raised only after a track record of on-time payment. Without a limit, a slow-paying customer can quietly accumulate a large outstanding balance before anyone notices there's a problem.
Tier Your Terms by Risk and Relationship
Not every approved customer needs identical terms. New customers might start on shorter terms or partial upfront payment; established customers with a strong payment history can graduate to longer terms or higher limits. Some businesses tier explicitly: cash on delivery or prepayment for unproven customers, net 30 for established accounts in good standing, and more favorable terms reserved for the largest, most reliable relationships.
Require Prepayment or Deposits Where It Makes Sense
For custom orders, large one-off projects, or new customers without a credit history, a deposit or partial prepayment protects the business without necessarily requiring full payment upfront. This is particularly important for orders involving significant material costs paid out before the customer pays anything, where a canceled or unpaid order otherwise leaves the business holding both the cost and the loss.
Monitor Accounts Receivable Aging, Not Just Total Sales
A simple aging report — showing what's owed and how overdue each invoice is — should be reviewed regularly, not just at tax time. Customers drifting from current into 30, 60, and 90 days past due are showing a pattern worth addressing before the balance grows larger. A credit policy without ongoing monitoring is just a policy on paper; the value comes from actually catching problems while they're still small.
Put Consequences in Writing and Actually Enforce Them
Decide in advance what happens when a customer goes seriously past due: a hold on new orders, a move to prepayment-only status, late fees if your contracts allow them, and at what point an account goes to collections. Communicate these consequences to customers upfront as part of the credit terms, and apply them consistently — a policy that gets waived every time a good customer pushes back stops functioning as a policy at all.
A credit policy isn't about being difficult with customers; it's about making a deliberate decision, rather than an accidental one, about how much of the business's cash is tied up financing other people's purchases. The businesses that get burned by bad debt are rarely undone by one large customer who couldn't pay — they're usually worn down by a slow accumulation of smaller extensions of trust that were never evaluated in the first place.
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