How to Give Credit - and How to Get Credit

A credit sale is not complete when the invoice goes out. It is complete when the money reaches the bank.

Credit helps businesses win customers, grow turnover and build lasting relationships. Managed badly, it ties up working capital, erodes margins and can threaten the business itself. Credit management is therefore not just a finance function. It is part of how a business sells, serves customers and grows sustainably.

A supplier that insists on cash before delivery can lose customers to competitors offering reasonable terms. But every credit sale means the seller is financing the customer for a period. Before offering terms, ask four questions: Who are we selling to? How much credit can they manage? When will they pay? What happens if they don't?

The answers should determine whether to grant credit, how much, and what controls apply.

The five Cs offer a practical framework:

·        Character: who the customer is and how they behave. Credit reports, payment history and trade references help, as does the track record of the people running the business.

·        Capacity: whether the customer can handle the facility and turn the goods or services into revenue in time to pay. A supplier eager to grow sales must still ask whether the buyer can absorb the volume.

·        Capital: the customer's financial strength, drawn from financial statements and management accounts. Decide on evidence, not optimism.

·        Conditions: industry pressures, economic uncertainty and shifts in the customer's market.

·        Collateral: recourse if things go wrong, such as credit insurance or a personal surety. These don't replace sound assessment, but they belong in a responsible approach.

A customer may be able to pay in full and still pay months late. That delay is costly. The cost of credit includes interest, overdraft charges, inflation and the opportunity cost of money tied up in receivables. I estimate it at roughly 2% a month, though it varies between businesses. At that rate, a sale paid three months late has given away about 6% of its value, which can be most of the margin on a low-margin sale.

The seller may then struggle to pay staff and suppliers, or borrow to cover the gap, even though the debt is eventually collected.

This matters most when selling to large organisations and public entities. Size does not guarantee prompt payment. Before accepting such a contract, a smaller business should test whether it can survive a longer payment cycle, and should never rely on an optimistic payment date to meet its own obligations.

Terms range from cash on delivery to seven- or fourteen-day terms and thirty-, sixty- or ninety-day accounts. Longer terms may suit some sectors or contracts, but the seller waits longer for its cash.

Limits need the same care. Too little credit frustrates a good customer. Too much encourages overtrading, where the customer takes on more stock or services than it can sell, use or repay in time. The right limit is not the largest amount a customer will accept. It reflects the customer's financial position, the expected sales cycle, the agreed terms and the seller's own ability to carry the exposure. A credit limit is real value, even when no cash changes hands.

Assessment doesn't end when an account is opened. Monitor payment behaviour and review customers regularly. A customer who pays you reliably may be under pressure elsewhere, and external payment patterns can give early warning that your own ledger won't show.

Buyers have responsibilities too. Give accurate information, understand what your business can realistically manage, and pay on time. If a problem arises, tell your supplier early and honestly. It is far harder to find a solution after a payment has been missed.

Payment behaviour also builds a track record. Future suppliers and credit providers use it to decide whether to extend credit and on what terms. Consistency widens access to credit; repeated late payment narrows it.

Good credit management reduces the need for aggressive collections. The time to manage risk is before the sale: choose customers carefully, set realistic limits, agree clear terms and monitor accounts. Do that, and credit control becomes a professional conversation rather than a last-minute attempt to rescue cash flow.

That doesn't mean avoiding every risky customer. It means understanding the risk and deciding whether the business can responsibly carry it. Sometimes that means securing the exposure, changing the terms or reducing the limit. Sometimes it means walking away from a sale that could endanger the business. Base those decisions on credible financial and commercial sources. AI tools can help with surface research, but where the exposure is significant, verify.

Then measure results. I'd aim for bad-debt write-offs below 0.2% of turnover, although benchmarks vary by industry. For businesses on thirty-day statement terms, track how quickly customers actually pay against those terms. Persistent delays should prompt investigation, not resignation.

The goal is not simply to make more sales. It is to make sales that turn into cash, and to build a business that can keep growing.v