As a B2B debt collection agency, 100% of the accounts we handle are the result of extending credit terms. You’ve provided your goods or services in advance, trusting your customer to pay on the agreed upon date. When that doesn’t happen, the exhausting process of trying to collect ensues. This can be difficult when the customer has already received your product – leaving less incentive to pay. When efforts to collect are unsuccessful, you may be left holding a bad debt to write off as a loss. It’s honestly a sad outcome after you not only extend credit terms, but your trust. But it doesn’t have to end this way!
In this article, we’ll provide proven tips and strategies we’ve learned across thousands of collections to help you:
• Evaluate customers you’re considering for credit terms
• Develop safer credit terms to minimize the risk of non-payment
• Ensure you get paid on time, with minimal effort
➡ Tip: Bookmark this page and share with your friends. These steps will save you a lot of time, money, and stress!
Don’t feel like reading? Here’s a quick AI video summarizing the article.
To Extend Credit Terms Without a Review Process is Like Handing Money to a Stranger
Think about this – credit card companies have billions of dollars, yet they require extensive personal and financial reviews before extend credit terms of even $1,000. Meanwhile, small businesses with limited cash extend thousands in credit, simply because a customer “seems” legitimate, or they’re afraid to lose a sale. Nobody wants to lose a sale, but we can’t overlook the risk we’re taking on in these situations. Beyond the loss of cash, chasing down payments costs us time and takes a toll on the team members tasked with collecting.
And if you think a credit review will be time consuming, how much time do you spend chasing unpaid invoices?
Unfortunately, even established businesses aren’t always reliable payers and when cash flow gets tight, smaller vendors can drop to the bottom of the priority list – especially if your customer doesn’t perceive you as a threat. Larger companies have collections partners and in-house legal teams. Smaller companies typically have fewer options for recourse, often limited to calls and emails requesting payment.
We want to help you avoid this painful cycle. Instead of chasing down unpaid invoices, let’s discuss best practices for extending credit terms, including key safeguards like establishing pre-authorized payment methods so you get paid on time, every time.
Best Practices When You Want to Extend Credit Terms to Your Customers
1. Require a Credit Application and Review It Thoroughly
Before extending credit, require potential customers to fill out a credit application that includes:
✔ Business details (legal name, address, tax ID)
Why this matters: This gives you the information needed to run a credit check but more importantly, it signals to your customer that you take credit terms seriously and there will be consequences if they don’t pay on time.
✔ Bank references
Why this matters: Helps confirm whether a business has sufficient funds and a healthy banking relationship. If their bank account is frequently overdrawn or they struggle to maintain a balance, this could be a red flag.
✔ Trade references (suppliers they already have credit with)
Why this matters: Essential for knowing how a business handles their financial obligations with other vendors. Unlike bank references, which assess overall financial health, trade references show real world payment behavior, and whether a company normally pays on time or delays payment.
✔ Ownership details
Why this matters: Helps you verify the legitimacy of the business, assess financial responsibility, and determine who is ultimately accountable if payments aren’t made. Some companies operate with a dba name, or are subsidiaries of parent companies. This information is vital when pursuing delinquent payments.
✔ Authorized contacts for payment
Why this matters: This gives you the information needed to run a credit check but more importantly, it signals to your customer that you take credit terms seriously and there will be consequences if they don’t pay on time.
Once you have this information, you can also run a business credit check to verify their financial stability.
• Dun & Bradstreet: Check Others’ Business Credit
• Experian: How To Check Business Credit Score
• Equifax: Business Credit Report for Small Business
➡ Tip: If the customer has no credit history and you still want to extend credit terms, consider a smaller initial credit limit and increase it gradually after successful (on-time) payments.
2. Set Clear Credit Limits and Payment Terms
Define your credit limits and payment terms upfront. This includes:
• Net 15, Net 30, or Net 60? Be clear about when payment is due.
• Interest on late payments – Always include a late fee (e.g., 2% per month, plus two admin hours) to discourage delinquency. If you end up in a collection situation, having a late fee in place is a huge benefit because it creates urgency around paying quickly, as addition fees begin piling up. Many people believe they can add a late fee to their payment terms once the customer is late – this is not true! If your customer did not agree to a late fee from the start, you will not be able to include one later. Same goes for legal fees.
• Credit limits per customer – Start small and increase based on payment history. We suggest never taking on a credit account that you can’t afford to absorb if the customer refuses to pay, as it can be devastating to your business.
➡ Tip: These terms must be clearly defined in writing and signed before you extend credit terms. Without indisputable proof that your customer was aware of the terms and agreed, they can later claim that they did not agree.
➡ Example: “Failure to pay within the agreed timeframe will result in late fees of 2% of the total open balance, plus two (2) administrative hours billed at ($amount) per hour, on a monthly basis until the balance is paid in full. Any collection agency and/or legal costs related to the pursuit of this payment may also be added to the balance after 60 days of non-payment.”
3. Require a Pre-Authorized Payment Method to Extend Credit Terms
One of the biggest mistakes small businesses make is waiting for customers to provide a payment method on the agreed upon payment date. Instead, request a pre-authorized payment method upfront.
And if your customer is uncomfortable providing such authorization, is this really someone you want to grant credit terms?
Here are the most common payment methods you might accept:
✔ A credit card on file (Key in the payment manually on the agreed upon date. Be sure to include any card processing fees in your terms.)
✔ ACH/direct debit authorization (Key in the payment manually on the agreed upon date.)
✔ Post-dated checks (Deposit on the agreed upon date.)
This way, when the due date arrives, you don’t have to chase payments – you simply charge the method on file. This one simple change can reduce 90% of your delinquent payment instances.
Of course, there can always be insufficient funds once you go to charge the payment method on file. But if you’ve taken the above credit check steps, you should avoid this issue most of the time.
➡ Tip: Your customers will appreciate a heads up 1 – 2 business days before processing the charge, but you don’t need to wait for their response. If they don’t reply, you have already received authorization to charge the amount to the payment method on file.
4. Send Invoices Promptly and Follow Up Regularly
If you don’t strictly adhere to your own timeline, it sends the message to your customer that timely payment is “not a big deal”. Strictly enforcing the terms you’ve laid out makes it clear that while you’re willing to be flexible in other areas of the business, timely payment is not one of them. This is the one area of your business where you should be rigid – even if you bend over backwards for your customers everywhere else.
Best practices include:
✔ Sending invoices immediately upon delivery of goods/services
✔ Clearly stating payment terms and due dates up front
✔ Setting up automated reminders for upcoming and overdue invoices
➡ Tip: Use invoicing software like QuickBooks, FreshBooks, or Zoho to streamline this process.
5. Implement a Collections Process for Late Payments
Even with the best precautions, some customers will delay payment or get caught in a cash flow crunch. Have a structured collections process in place:
✅ 1-3 days late: Send a friendly reminder.
✅ 7 days late: Follow up with a firm request and phone call. Very important to pick up the phone at this stage to find out what’s going on and let them know that this is on your radar. Emails can feel impersonal and therefore, easier to dismiss. Call at least once per week from this point, or as discussed with your customer.
✅ 30 days late: Impose late fees and issue a formal demand letter.
✅ Beyond 30 days: Consider working with a collections agency or legal counsel. Unless you’re confident that the issue will be resolved, we suggest introducing a third-party to assist with collection no later than 45 days past the due date (or sooner if communication is not consistent).
➡ Tip: If a customer repeatedly delays payments, revoke their credit terms and switch them to prepaid only.
6. Protect Yourself with Personal Guarantees
For high-risk customers, a personal guarantee from the business owner may be a requirement to extend credit terms. This means that if the company can’t pay, the individual is personally responsible.
Some business owners exploit the protections they get from their business entities, and this is one sure-fire way to protect yourself from any predatory practices.
Obviously, the goal is not to end up in court suing your customer personally for an outstanding balance. But having these options in place will deter them from putting you in the position to have to do so. And if they do, you’ll feel much better knowing that you’ve protected yourself with iron clad payment terms.
➡ Tip: Personal guarantees are particularly useful for newer businesses with no credit history. Larger business will rarely agree to such terms, but they’re generally less risky to begin with.
FAQs About Extending Credit Terms
What is a good starting credit limit for a new customer?
This can vary based on the industry, and what your business can support safely. Here are some common credit limit formulas:
✅ 1. Percentage of Annual Revenue (most common)
• Many businesses set a credit limit at around 3 – 5% of a customer’s annual revenue.
• Example: If a business has $2 million in revenue, their initial credit limit might be $60 – $100K.
✅ 2. Percentage of Cash on Hand (useful for cash heavy businesses)
• You might start around 10% of the customer’s cash reserves to ensure liquidity.
• Example: If a business has $500K in cash, a $50K credit line may be a reasonable starting point.
✅ 3. Multiple of Average Order Size
• The credit limit should cover at least 1.5 – 2x their average order size.
• Example: If a company’s typical order is $20K, a credit limit of $30K – $40K could be appropriate.
For a consultation to help you develop payment terms that fit your unique needs, email info@paymentresolutionpartners.com.
How do I enforce late payment fees?
Clearly outline late fees in your payment terms on the contract and/or invoice. If a customer refuses to pay, stop extending credit immediately.
Each time you apply new late fees (e.g. every 30 days), send an updated statement including these fees and the current balance due.
What if a customer refuses to provide pre-authorized payment details?
That’s a red flag! Consider a lower credit limit or requiring upfront payments. There is no valid reason someone should expect to receive goods or services upfront and leave you with no assurance that you’ll be paid aside from their handshake.
If they have valid concerns about the quality of your goods or services, be sure to address them in your return / refund policy.
Can I report late payments to credit bureaus?
Yes! Services like Experian Business and Dun & Bradstreet allow you to report delinquent accounts. Alternatively, many collections agencies or collection attorneys have the ability to report on your behalf.
Should I use a collections agency?
If an invoice is over 45 days past due and/or communication is unstable, collections may be the best option. Act quickly to minimize losses.
The Bottom Line: Get Paid Without the Stress
Extending credit terms can help you attract more customers, but you must have the right safeguards in place to avoid catastrophe. By requiring pre-authorized payments, running credit checks, and enforcing clear policies, you can avoid the hassle of chasing down invoices and the pain of writing off losses.
Remember, hope isn’t a strategy! Get paid on time, every time.
Need Help Setting Up Payment Policies?
Reach out for expert guidance on setting up credit terms and payment terms, including template forms and more!
Email “Credit terms tips” to: info@paymentresolutionpartners.com or call 888-789-7108
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