In this guide (10)
- Why is trade credit so risky for a wholesaler?
- Who should get credit, and who should not?
- How do you set a credit limit?
- Which payment terms should you offer?
- How do you read an aged debt report?
- How do you collect money without losing the customer?
- When should you stop supplying a customer on credit?
- What should a one-page credit policy contain?
- How EasyTaskr helps
- Questions people ask
Key takeaways
- Every bad debt has to be earned back with many times its value in new sales.
- Set a credit limit for every account, sized to what the customer buys while an invoice is open.
- Read the aged debt report weekly and act on anything past terms.
- Collecting is a routine with fixed steps, not a favour you ask for when cash is tight.
- Stopping credit is not the same as stopping supply: move slow payers to cash on delivery.
Why is trade credit so risky for a wholesaler?
Because your margin is thin, a single unpaid invoice can cancel out the profit on a great deal of good business. Credit is a loan of your stock, usually with no interest and no security, to a business you do not control.
The sum is simple. If you lose an invoice, you lose its full value, not just the profit on it. To earn that money back you need new sales of:
Sales needed to recover a bad debt = bad debt ÷ your gross margin
| Bad debt | Margin 10% | Margin 15% | Margin 20% | Margin 25% |
|---|---|---|---|---|
| 1,000 | 10,000 | 6,667 | 5,000 | 4,000 |
| 5,000 | 50,000 | 33,333 | 25,000 | 20,000 |
| 10,000 | 100,000 | 66,667 | 50,000 | 40,000 |
At a 15% margin, one shop that disappears owing 5,000 means you must sell 33,333 more just to stand still. That is why credit decisions deserve the same care as buying decisions.
Who should get credit, and who should not?
Give credit to customers who have shown you they pay, not to those who simply ask for it. A short, consistent process protects you and makes saying no less personal.
- Start on cash. The first three orders are cash on delivery or paid before dispatch, with no exceptions for "good" customers.
- Collect the basics on a one-page form: legal business name, trading name, owner's name, delivery and billing addresses, phone, how long they have traded, expected monthly spend and who approves payments.
- Ask for two trade references from suppliers they already buy from on credit, and actually call them. Ask how long they have supplied, the limit they give and whether payments arrive on time.
- Check public records where your country offers them, such as company registers.
- Agree terms in writing before the first credit order. Both sides sign or accept them.
Be careful with customers who push for credit on the first order, who want a large opening order on terms, or who have recently changed owner or trading name.
How do you set a credit limit?
Size the limit to what the customer will owe you at the busiest point of their payment cycle, then start lower for new accounts. A limit that is too low causes daily friction; one that is too high hides a problem until it is large.
Credit limit ≈ monthly purchases × (payment term days + days between orders) ÷ 30
Worked example. A shop buys about 6,000 a month from you, on 30 days from invoice, with a delivery every week (7 days apart).
- 6,000 × (30 + 7) ÷ 30 = 7,400
- Round to a working limit of 7,500.
For a new account, start at about half of that, 3,750 here, and review it after three to six months of on-time payments. Raise limits on evidence, never because a rep says the customer is "good for it".
Write the limit on the account and check it before every order is confirmed, not at month end. A limit nobody checks is not a limit.
Which payment terms should you offer?
Offer the shortest terms your market accepts, state them on every invoice, and keep them the same for similar customers. Shorter terms reduce both your cash tied up and your risk.
| Terms | What it means | Suits |
|---|---|---|
| Cash on delivery | Paid when goods arrive | New customers, overdue accounts, one-off buyers |
| Payment before dispatch | Paid before you load | Large first orders, distant customers |
| 7 days | Due a week after the invoice date | Fast-moving goods, weekly deliveries |
| 14 days | Due two weeks after the invoice date | Most small shop accounts |
| 30 days from invoice | Due 30 days after the invoice date | Established accounts with a good record |
| 30 days end of month | Due 30 days after the end of the invoice month | Larger accounts only; can mean almost 60 days |
If you offer a discount for paying early, work out what it costs. A 2% discount for paying in 10 days instead of 30 is a high price for 20 days of cash, so offer it only if you badly need the cash or it replaces a riskier arrangement.
How do you read an aged debt report?
An aged debt report (also called debtor ageing) lists who owes you money and sorts each unpaid invoice by how long it has been open. Older money is harder to collect, so you read it from right to left.
| Customer | Not yet due | 1–30 days overdue | 31–60 days | 61–90 days | Over 90 days | Total | Limit |
|---|---|---|---|---|---|---|---|
| Corner shop A | 2,400 | 0 | 0 | 0 | 0 | 2,400 | 5,000 |
| Café B | 1,100 | 900 | 0 | 0 | 0 | 2,000 | 3,000 |
| Mini market C | 3,000 | 2,800 | 1,600 | 0 | 0 | 7,400 | 7,500 |
| Hardware D | 0 | 0 | 0 | 650 | 1,200 | 1,850 | 2,500 |
What this tells you:
- A is fine.
- B has one invoice slipped by a few days. A friendly call is enough.
- C is at its limit with money more than 30 days overdue. Hold the next order until the oldest invoice is paid.
- D has stopped paying. Its balance is small, but money over 90 days old is at real risk. Stop credit today and start formal recovery.
Track one overall number too, the average days your customers take to pay (often called debtor days or DSO):
Debtor days = amount owed ÷ credit sales over the period × days in the period
If customers owe 48,000 and your credit sales over the last 90 days were 120,000, debtor days = 48,000 ÷ 120,000 × 90 = 36. On 30-day terms that means customers pay, on average, about a week late. Watch the trend month by month: a rising figure is an early warning.
How do you collect money without losing the customer?
Make collecting a fixed routine that starts before the due date, so a reminder never feels like an accusation. Customers who know you always follow up tend to pay you first.
| When | Action |
|---|---|
| 3 days before due | Polite reminder with the invoice attached |
| Due date + 1 day | Phone call: "Has this been scheduled for payment?" Get a date |
| Due date + 7 days | Second call and a statement showing all open invoices |
| Due date + 14 days | Hold new credit orders; deliver only against payment |
| Due date + 30 days | Account on stop; written notice of the overdue amount |
| Due date + 60 days | Formal demand, then recovery or legal advice |
A few habits help a lot:
- Talk to the person who pays, not the person who orders. Get their name on the account form.
- Record every promise with a date and an amount, and call on that date if the money has not arrived.
- Let reps collect on visits where safe, and give a receipt every time.
- Send statements every month, so customers see every open invoice and credit in one place.
- Fix disputes fast. A short delivery or a damaged case is the most common reason for a held payment. Issue a credit note for the agreed amount instead of editing or deleting the original invoice, so both sides can see what happened.
When should you stop supplying a customer on credit?
Stop credit as soon as a clear rule is broken, not when your patience runs out. Written rules make the call easier for you and your reps, and they treat every customer the same.
Move an account to cash on delivery when any of these happens:
- The balance would go over the credit limit with the new order.
- The oldest unpaid invoice is more than 14 days past its due date.
- A payment bounces or is reversed.
- A promise to pay is broken twice.
- The customer pays new invoices but leaves an older one, or starts paying in small irregular amounts.
- Order sizes drop sharply, they ask for longer terms, or you hear they have changed owner or other suppliers have stopped them.
Stopping credit is not the same as refusing to trade. Most customers accept cash on delivery while they clear the old balance, and many become good accounts again. Restore credit with a lower limit once the account is fully clear and has stayed clear for a few weeks.
What should a one-page credit policy contain?
Write it down and give it to everyone who sells or delivers:
- Who can approve a new credit account and a limit increase.
- The three-cash-orders rule for new customers.
- Standard terms, and who may agree anything different.
- How limits are calculated and when they are reviewed.
- The collection timeline with named owners for each step.
- The stop rules, and who can override them (ideally nobody but the owner).
- How disputes and credit notes are handled.
Review the policy every six months against your aged debt report. If the over-60-days column keeps growing, the policy is not being followed or is too loose.
Questions people ask
What is a normal credit limit for a new trade customer?
A common approach is to start at about half of what the customer would owe at full terms, then raise it after three to six months of on-time payment.
What does 30 days end of month mean?
The invoice is due 30 days after the end of the month it was issued in. An invoice dated early in the month can therefore take nearly 60 days to fall due.
Can I charge interest on late trade payments?
Many countries give businesses a legal right to charge interest or fees on late commercial payments, but the rules differ. Put your terms in writing and check the law where you trade.
How often should I send statements?
Monthly at least, and whenever an account goes overdue. A statement shows every open invoice and payment in one place, which settles most disputes quickly.
