Winning a new customer is usually good news for a business. However, when that customer asks for 30, 60 or even longer payment terms, accepting the work also means accepting an element of financial risk.

Offering credit can make your business more attractive to potential customers and help develop long-term commercial relationships, but it is important to understand who you are extending credit to and how much exposure your business can comfortably manage.

Before agreeing terms with a new customer, there are several factors worth considering.

Check the Customer’s Creditworthiness

A new enquiry or large order can be exciting, but carrying out appropriate checks before offering credit can help you make a more informed decision.

Depending on the size of the potential exposure, this could include reviewing available company information, credit reports, accounts and other relevant financial information.

A credit check cannot guarantee that a customer will pay, but it can help identify potential warning signs and provide a clearer picture of the business you are considering trading with.

Consider Their Payment History

Where information is available, understanding how a customer has previously paid suppliers can provide useful context.

A business may appear financially healthy but have a history of paying invoices significantly beyond agreed terms. Consistently slow payment could have an impact on your own cash flow, particularly if you are committing substantial resources to fulfilling their orders.

It is therefore important to consider not only whether a customer is likely to pay, but when payment is likely to arrive.

Set Appropriate Credit Limits

Agreeing to offer credit does not mean giving a customer unlimited access to it.

Setting a credit limit can help control the amount of money at risk at any one time. The appropriate limit will depend on factors such as the customer’s financial position, anticipated order values, payment terms and your own ability to absorb a potential loss.

Limits can also be reviewed as the relationship develops rather than remaining unchanged indefinitely.

Think About the Payment Terms

Thirty-day terms may create a very different level of exposure from 60 or 90 days, particularly where orders are frequent.

The longer an invoice remains outstanding, the longer your business is effectively financing the transaction.

Before agreeing terms, consider the costs you will incur while waiting for payment and whether your own cash flow can comfortably accommodate the arrangement.

Consider Your Overall Exposure

A customer does not need to represent the majority of your turnover to create a significant financial risk.

Think about how much the customer could owe at any one time, particularly if several invoices are outstanding simultaneously. You should also consider the costs already incurred in delivering the goods or services.

A useful question is simple: if this customer failed to pay the maximum amount you were prepared to extend to them, could your business absorb the loss?

Continue Monitoring Existing Customers

Credit assessment should not necessarily end once the first invoice has been paid.

A customer’s financial position can change over time. Businesses can lose contracts, experience cash-flow difficulties or face problems within their own supply chains.

Regularly reviewing significant credit exposures can help businesses respond when circumstances change rather than relying solely on information gathered at the beginning of a relationship.

Where Does Trade Credit Insurance Fit In?

For businesses regularly selling goods or services on credit, Trade Credit Insurance can form part of a wider credit management strategy.

Alongside providing protection against certain insured losses caused by customer non-payment, credit insurers can provide financial information and insight that helps businesses assess and monitor customer risk.

This can be particularly valuable when considering larger customers, substantial credit limits or opportunities in unfamiliar markets.

Insurance should not replace good credit control, but it can provide an additional layer of protection where customer debts represent a significant financial exposure.

Making Informed Decisions About Customer Credit

Offering credit will always involve balancing commercial opportunity with financial risk.

Carrying out appropriate checks, setting sensible limits, agreeing suitable payment terms and monitoring customer exposure can help businesses make more informed decisions without unnecessarily restricting growth.

At W B Baxter, we can help businesses assess their Trade Credit Insurance requirements and identify suitable protection against customer non-payment.

As part of Adler Fairways, W B Baxter provides clients with personal service backed by access to wider insurance expertise and markets.

Contact our team today to discuss Trade Credit Insurance and how it could help protect your business.

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• The cover available and policy features will vary between insurers and policy wordings. Specific terms, conditions, exclusions and eligibility criteria apply.
• The scope of cover, conditions, exclusions and limits will vary between insurers and policies. Businesses should review policy documentation carefully and seek professional advice where appropriate
• Trade credit insurance may not cover all circumstances and claims. Businesses should review policy documentation carefully and seek advice regarding their specific requirements.
• The suitability of trade credit insurance will depend on the nature, size and activities of your business.
• This article is provided for general information only and does not constitute advice. Whether trade credit insurance is suitable will depend on your individual business circumstances.