Which Customers Deserve More Credit?

Quick Saturday Read!

Extending credit to customers can be a smart way to build relationships and support sales. But if you’re not careful, it can also turn into a silent drain on your cash flow. Offering generous terms or high credit limits without regular review often means you’re financing your customers’ businesses at your own expense. $$$

The truth is that every time you approve extended terms or a higher credit limit, you’re taking on risk. If payments slow down, that risk shows up in your bank account — delayed cash, tighter operations, and less flexibility for growth.

Here’s why analyzing your credit terms and limits matters in my opinion:

• Cash Flow Protection: The longer customers take to pay, the more cash is tied up in receivables instead of fueling your business.

• Risk Management: Overextending credit increases exposure if a customer defaults or goes through a downturn.

• Fairness Across Customers: If one client consistently pays late while others meet terms, you’re rewarding poor behavior and setting a precedent.

• Operational Efficiency: Collections teams spend more time chasing invoices when terms are too loose or limits are too high.

So how do you protect your business without hurting customer relationships?

• Review Terms Regularly: Don’t set terms once and forget them. Revisit customer payment history and financial health at least annually.

• Align Terms with Behavior: Reward reliable customers with more flexibility, but tighten terms for those who pay late.

• Set Realistic Credit Limits: Base limits on actual payment history, not just the size of the customer or the potential deal.

• Train Your Team: Ensure sales and finance work together so growth doesn’t come at the cost of financial risk.

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The bottom line: extending credit is a privilege, not a guarantee. By setting terms and limits thoughtfully, you protect your cash flow, reduce risk, and ensure you’re not financing customers at the expense of your own stability.

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