Credit Policy — How Much, to Whom, and When to Stop

Why You Need It in Writing

Credit granted informally is credit granted under pressure. The order is in front of you, the salesperson wants the sale, the customer is confident, and the decision gets made in ninety seconds on the basis of how the conversation felt.

A written policy moves the decision to a calm moment. It also does three things a verbal understanding cannot:

• It lets your staff say no without it becoming personal — "the policy is 45 days" is easier to say than "I don't trust you".
• It makes exceptions visible, because someone has to authorise them in writing.
• It gives you something to point at when a customer argues that they were always given 90 days.

Checking a New Customer — Cheap and Fast

Nearly all of this costs nothing and takes under twenty minutes.

A Simple Scoring Method

You do not need a credit bureau. Score each factor 1 (poor) to 5 (excellent), add them up, and use the total to set the starting position.

The scoring is not scientific and does not need to be. Its value is that it forces the same five questions to be asked every time, which is more than most businesses manage.

Setting the Limit

Three sensible ways to arrive at a number. Use whichever is lowest.

1. One month's expected orders. If they will buy ₹2 lakh a month, start at ₹2 lakh. Simple, and it self-adjusts as the relationship grows.
2. What your margin can absorb. At a 15% gross margin, a ₹3 lakh bad debt needs ₹20 lakh of replacement sales just to break even. Ask yourself how much extra selling you would be willing to do to cover this customer failing.
3. A share of your total receivables. No single customer above, say, 15% of your outstanding book. Concentration is what turns one failure into your failure.

Setting the Terms

• Start shorter than you expect to end. It is easy to extend terms as trust builds and very hard to pull them back.
• Match terms to your own cycle. If you pay suppliers in 30 days, giving customers 60 means funding the gap yourself — deliberately, if at all.
• Write down when the clock starts — invoice date or delivery date. This ambiguity alone costs weeks.
• State the interest clause, even if you rarely enforce it. You cannot claim what was never agreed, and it is a useful thing to waive in exchange for immediate payment.
• First order from anyone new: advance or part-advance. A customer unwilling to pay anything up front on a first order is telling you something.

The Credit Hold Rule

A limit with no consequence is a suggestion. The hold rule is what makes it a limit.

Three things make it stick:

• It is automatic. Nobody has to decide, so nobody has to be the villain.
• It applies to everyone. The first exception you grant becomes the precedent every other customer cites.
• Overrides are written and visible. Most bad exposures are built out of verbal exceptions nobody wrote down.

Tell the customer about the rule when you open the account, not on the day you apply it. A hold that was disclosed at the start is a policy; a hold that appears without warning is an insult.

When to Stop Supplying Altogether

A credit hold pauses. Stopping is a different decision, and the signals are usually there well before owners act on them:

• They pay only when you chase, every single time, and never on the promised date.
• Payments have become part-payments, and the balance never clears.
• Cheques have bounced — see Part 7.
• Orders are increasing while payments slow. This is the clearest danger sign there is: they are switching to you because their other suppliers have already stopped.
• Their GST filings have stopped.
• They dispute invoices only after they fall due, never on receipt.

Reviewing Limits

Limits set once and never revisited are the most common source of large exposures. Review them:

• Upward after three or four clean cycles — and tell the customer, because it is worth goodwill.
• Downward the moment payment behaviour deteriorates, not after the next order.
• Annually for everyone, as a fixed exercise, so it does not depend on somebody noticing.

A One-Page Policy You Can Actually Use

Keep it to a page. A policy nobody reads is worth nothing.

1. New customers supply on advance or part-advance for the first order.
2. Credit is granted only after the GSTIN, MCA and two trade reference checks are complete.
3. Opening limit is one month's expected order value, capped at ₹____.
4. Standard terms are ____ days from invoice date. Extensions need written approval.
5. Interest at ____% per month is chargeable on overdue amounts, as stated on every invoice.
6. Credit hold applies automatically at 60 days overdue or on breach of limit.
7. Limits are reviewed after three clean cycles, and annually for all customers.
8. Accounts past 180 days go to the owner for a settle, litigate or write off decision.
9. Every exception is recorded in writing against the customer.

Fill in the blanks, sign it, give a copy to whoever takes orders, and put the limits into your accounting system so the ageing report and the policy are looking at the same numbers.

What's Next?

• Part 4 — Reminder Scripts: what to send when a limit is breached
• Part 5 — The MSME 45-Day Rule
• Part 8 — Bad Debts: when the credit decision has already gone wrong
• Part 2 — Ageing Analysis