Selling on Credit Is Lending Money: 6 Rules for Customer Credit Limits Before a Bad Debt Hits

On January 15, 2018, Carillion, the second-largest construction company in Britain, went into compulsory liquidation. It reportedly owed around £2 billion to some 30,000 suppliers and subcontractors, many of them small family firms that had kept delivering on 120-day terms because Carillion was a household name that won government contracts. Some of those firms had never lost more than a few thousand pounds to a bad payer before. In one week, they discovered they had been lending money to a company that could not pay it back.

That is the uncomfortable truth about selling on credit. Every time you ship goods and send an invoice payable in 30, 60 or 90 days, you are making an unsecured loan to your customer, usually without the analysis a bank would do before lending a single dollar.

And almost everyone does it. According to the Atradius Payment Practices Barometer for the United States (2026), US businesses conduct on average 45% of their B2B sales on credit, late payments affect 22% of B2B receivables, and companies often report losing 1% to 2% of their B2B invoices as bad debt. That sounds small until you do the arithmetic.

Our group has sold in more than 75 countries since 1890, mostly to distributors, retailers and hospitality customers who expect payment terms. These are the six rules I use before we let a customer owe us money.

Why does a small bad debt hurt so much?

Because you lose the cost of the goods, not just the margin, and you have to sell a lot to earn it back.

Suppose your net margin is 10%. A customer goes bankrupt owing you $50,000. To replace that $50,000 of lost cash with profit, you need $500,000 of new, fully paid sales. At a 10% margin, every dollar of bad debt costs you ten dollars of sales to recover. At a 5% margin, it is twenty.

That is why credit control is not an accounting chore. It is a profit decision, and in a downturn it is a survival decision.

Rule 1: Write a credit policy before you need one

Most companies extend credit by habit. A salesperson promises "the usual terms," the customer starts ordering, and nobody ever decided how much exposure the business would accept.

A one-page credit policy fixes that. It should state:

• Standard terms (for example, net 30) and who can approve longer ones.
• What a new customer must provide: legal name, tax ID, trade references, bank reference, and financial statements above a certain order size.
• Who sets credit limits and who can raise them, which should never be the person paid commission on the sale.
• What happens when an invoice is late: the reminder schedule, when shipments stop, and when the account goes to collection.

If the salesperson can approve the credit, you do not have a credit policy; you have a sales incentive with your balance sheet attached. Sales and credit should talk every week, but the final word on exposure belongs to finance.

Rule 2: Set a limit for every customer, in writing

A credit limit is the maximum amount a customer may owe you at any moment, including orders shipped but not yet invoiced. Without one, a fast-growing account can quietly become your largest unsecured loan.

There is no single formula, but practical methods include:

• A share of the customer's net worth. Sage's guidance cites a common starting point of about 10% of the customer's net worth, adjusted for risk.
• Their payment history with you, scaled up only after months of on-time payment.
• What other suppliers extend, from trade references and credit bureau data (Dun & Bradstreet, Experian, Creditsafe and similar services).
• What you can afford to lose, which is the method most companies forget.

The last test is the one that protects you. No single customer's limit should be larger than a loss your business could absorb without missing payroll. If a key account needs more, that is a reason to secure the exposure (Rule 5), not to stretch the limit. It is the credit version of the concentration risk we discussed in why no single account should be able to kill your business.

Rule 3: Match the terms to your own cash cycle, not to the competition

Long payment terms are a sales tool, and competitors use them. But terms are also financing, and someone pays for it.

If you pay your suppliers in 30 days and give your customers 90, you are funding 60 days of their business with your cash or your bank line. That gap is exactly what we measured in the cash conversion cycle: the longer it gets, the more working capital growth consumes.

• Price long terms. If a customer wants 90 days instead of 30, the extra 60 days have a cost of capital. Build it into the price or offer an early-payment discount (such as 2/10 net 30) instead.
• Shorten terms for weak payers, even if they are large.
• Never let terms drift. A customer who pays on day 75 of a 30-day invoice has unilaterally given themselves 75-day terms.

Payment terms are a price, and if you do not charge for them, you are giving away margin you will never see on the P&L.

Rule 4: Watch the warning signs, not just the aging report

An aging report tells you what is late. It does not tell you why, and by the time an invoice is 90 days overdue, the information is old.

The Atradius barometer is useful here: in the US, 55% of suppliers report that business customers delay payment, and the main reason given is customer liquidity problems. Liquidity problems show up in behavior before they show up in default:

• Payments that used to arrive on day 28 now arrive on day 45.
• Partial payments, "the check is in the mail," or invented disputes about delivered goods.
• New requests for longer terms or larger orders at the same time.
• Key staff leaving, a change of bank, late tax filings or liens appearing in public records.
• Their other suppliers asking for cash in advance.

The most valuable credit signal is a good customer who suddenly starts paying a little later every month. Review your top accounts monthly, and give your sales team the job of reporting what they see on site. They usually know first.

Rule 5: Secure the exposure you cannot afford to lose

Some customers are worth selling to but too big or too risky to sell to unsecured. You have options between "no" and "yes, on open terms":

• Cash in advance or a deposit for new or weak customers.
• Letters of credit, standard in many export markets, where a bank guarantees payment against documents.
• Personal or parent-company guarantees for small companies whose owners control the cash.
• Retention of title clauses, so goods remain yours until paid (enforceability varies by country, so take local advice).
• Trade credit insurance from insurers such as Allianz Trade, Atradius or Coface, which covers a share of a customer's default and, just as useful, gives you an insurer's view of that customer's limit.

When the credit insurer refuses to cover a customer, treat it as the cheapest credit report you will ever get. It does not mean you cannot sell to them. It means you should not sell to them on open terms.

Rule 6: Collect like a professional, and decide when to stop

Most bad debt starts as a late invoice that nobody chased. The Atradius data shows that most overdue B2B invoices in the US are settled within a month past due, which means a disciplined process recovers most of the money if it starts early.

• Invoice the day you ship, accurately, with the purchase order number. Errors are the most common excuse for paying late.
• Remind before the due date, then at 1, 15 and 30 days late, with a named person on both sides.
• Stop shipping at a fixed point written in the policy, for example 30 days past due. Every new shipment to a late payer increases a loss you may already have.
• Escalate to a collection agency or lawyer at a fixed point, often 60 to 90 days. The longer an invoice ages, the less of it you recover.

The hardest part of credit control is not chasing money; it is stopping shipments to a customer you like. I have seen more money lost to loyalty than to fraud.

Key Takeaways

• Selling on terms is lending money unsecured. Treat it with a lender's discipline.
• At a 10% net margin, every dollar of bad debt needs ten dollars of new sales to recover.
• A written credit policy separates the person who sells from the person who approves the risk.
• Every customer gets a written limit, and no limit should exceed a loss you could absorb.
• Payment terms are a price: charge for long ones or reward early payment.
• Watch payment behavior month to month; a good customer paying later and later is the first warning.
• Secure big exposures with deposits, letters of credit, guarantees or credit insurance, and stop shipping at a fixed point.

Frequently Asked Questions

What should be included in a credit policy?

A credit policy should define standard payment terms, the information required to open a credit account, how credit limits are set and who approves them, and the collection process for late invoices. It should also state when shipments stop for overdue accounts and when an account goes to a collection agency. One page is enough if every rule is specific.

How do you decide a credit limit for a customer?

Combine the customer's financial strength, their payment history, what other suppliers extend to them, and the loss your own business could absorb. A common starting point is around 10% of the customer's net worth, adjusted for risk, then raised gradually after months of on-time payment. Review limits at least once a year and whenever payment behavior changes.

What are acceptable payment terms for B2B customers?

Net 30 is the most common standard in the US, and net 60 or net 90 is frequent in some industries and export markets. The acceptable term is the one your own cash cycle can fund: if you pay suppliers in 30 days, every extra day you give customers is financed by you. Price long terms or offer early-payment discounts.

What does "net 30" mean?

Net 30 means the full invoice amount is due 30 days after the invoice date. A variation such as "2/10 net 30" offers a 2% discount if the customer pays within 10 days, with the full amount due at 30 days. It is a simple way to reward customers who pay early.

Is trade credit insurance worth it?

For companies with large exposures to a few customers, or that sell abroad, it often is. The policy pays a share of the loss if an insured customer defaults, and the insurer's own assessment of each customer acts as an independent credit check. For many small accounts, a strict internal process may be cheaper than the premium.

Credit Is a Gift Only If You Decide to Give It

Payment terms win customers, and we will keep offering them. The difference between a supplier that survives a customer's failure and one that goes down with it is rarely luck. It is whether someone decided, in advance and in writing, how much the company was willing to lend, to whom, and on what terms. If you are reviewing your own working capital, start with how to negotiate better credit terms with your bank, because the line that funds your receivables is part of the same equation.

To see how we apply this discipline across eight business lines, explore the Manzanos Enterprises group.