How to offer customer credit: Credit policy guide for businesses

As a small business owner, your ultimate goal is to turn a profit. Offering a variety of payment options can help you boost your bottom line while providing customers with the flexibility to pay in a way that works best for them.

Customer credit is a popular payment option for B2C and B2B transactions, but incorporating it into your accounts receivable can be intimidating. In fact, QuickBooks research found that nearly 50% of small business owners face cash flow problems, often due to issues like late customer payments.

In this guide, we'll define customer credit, discuss policy options, and explain how to start safely offering customer credit if it makes sense for your business. Read on for a full picture of customer credit, or use the links below to skip ahead.

What is customer credit?

Benefits of offering customer credit

Risks of offering customer credit

How to decide if offering customer credit is right for your business

What is a credit policy?

Components of a credit policy

How to offer credit to your customers: Best practices

Accounting for customer credit

What is customer credit?

Customer credit is a form of payment that allows small business customers to purchase a product or service before paying for it in full. The process works similarly to the way a credit card does—you procure something and pay it back later. But when a small business offers customer credit, they take on the credit risk, not the credit card company.

81% of businesses report an increase in delayed payments.

Let’s go over an example of how customer credit works in a B2B transaction:

Let’s say you supply fresh fish to local restaurants, and you allow your restaurant partners to pay in credit. You invoice them for the total amount due, outlining your payment terms, which may include information on late fees and credit limits. This is a typical example of what customer credit looks like.

Why is customer credit important to businesses?

Customer credit gives your clients a little extra wiggle room to pay for the products or services ordered. This can be especially helpful when conducting B2B transactions with other small businesses that may not have the cash flow upfront but can pay later on down the road.

Benefits of offering customer credit

Offering credit can make it easier for customers to buy from you, helping boost sales, build loyalty, and keep you competitive. When managed well, it can be more than just a payment option—it can be a growth tool.

Keeps you competitive in your industry

If your competitors already allow customers to pay on credit, not doing so could put you at a disadvantage. Matching industry standards ensures you’re not losing business to competitors, while offering more flexible or favorable terms can give you a clear edge.

Creates opportunities for increased sales

Flexible payment options open the door to more revenue. Customers who may not have been able to purchase upfront can buy on credit, while existing customers may increase order sizes because of the additional flexibility.

Strengthens customer relationships

Offering credit signals that you trust your customers, which can deepen relationships and encourage long-term loyalty. This trust and convenience can lead to repeat business, long-term contracts, and stronger partnerships.

Risks of offering customer credit

Offering credit can help you win more business, but it’s not without downsides. Before extending terms to customers, you should understand the risks that can affect your cash flow, operations, and overall financial health.

Disrupts accounts receivable funding

When you let customers pay later, you’re essentially financing their purchase. This flexibility for them can mean a strain on your cash flow. If you’re waiting weeks—or even months—for payments to come in, it can be harder to cover your own expenses like payroll, rent, or vendor bills.

Runs the risk of late or unfulfilled payments

The most obvious risk of offering credit is nonpayment. Customers may delay payments, make partial payments, or default altogether. 

In fact, 55% of B2B invoiced sales in the U.S. are currently overdue, and 9% of those turn into bad debt—even just a handful of delayed payments can disrupt your budget and force you to tap into reserves.

Creates management challenges for accounts receivable

The more customers you extend credit to, the more complicated your accounts receivable (AR) becomes. Pending balances build up on your books, making it harder to get a clear picture of your finances. Without careful tracking, you might misjudge your available cash or overlook overdue invoices.

Increases administrative costs

Managing credit accounts isn’t just about waiting for payments, it takes real resources. You or your accounting will need to track invoices, send reminders, and follow up on late accounts. In some cases, you may need to involve a collection agency. 

All of this adds to your operating costs, which can cut into the profit boost you expected from offering credit in the first place.

On top of that, you’ll likely need software to manage invoicing, AR aging, and credit monitoring.

How to decide if offering customer credit is right for your business

Before extending credit to customers, it’s important to consider whether your business can support it. Offering credit can strengthen customer relationships and increase sales, but it also comes with risks that not every small business is ready to take on.

Evaluate your cash flow stability

Start by reviewing your current cash flow. Can your business cover day-to-day expenses if payments are delayed? 

Look at your revenue trends, cash reserves, and how much working capital you have on hand. If a few late payments would leave you struggling to pay vendors, employees, or other bills, it may be better to hold off on offering credit until your financial position is stronger.

Weigh industry norms and competition

Next, consider what’s standard in your industry. In some fields, like construction or B2B wholesale, offering credit is common and may be expected by customers. Research your competitors and see if extending credit gives you an edge or simply helps you stay competitive. 

On the other hand, if your industry typically runs on upfront payments, you might not need to take on the added risk of offering credit.

What is a credit policy?

A credit policy is a set of guidelines a business uses to set payment terms for its customers. A credit policy also acts as a document for internal reference.

A credit policy can include guidelines such as:

• The payment due date
• The maximum amount a customer can buy on credit, also known as the credit limit
• Credit terms, like what happens if a payment is past due
• Accepted methods of payment
• Information on early payment discounts
• Collections methods for unpaid invoices
• Delinquent accounts policy
• Description of the structure of your small business’s credit department and the credit manager’s contact details

Why are credit policies important?

Credit policies are important for several reasons: they create payment guidelines and offer instructions for your customers to complete payment. But ultimately, credit policies protect your small business financially by establishing payment expectations and, in turn, minimize the number of bad debts you may have to write off at the end of the year.

Components of a credit policy

Now that you’re familiar with the purpose credit policies serve, let’s take a closer look at the components of a credit policy.

Credit limit

Credit limit describes the maximum amount of credit your small business will offer to customers. Just like credit card companies limit how much you can spend as part of their credit risk management, so too can small businesses. 

Setting a credit limit can help you keep your accounts receivable funded and, ultimately, protect your small business’s cash flow. You may choose to set the credit limit for individual customers according to factors like their credit history.

Credit terms

Credit terms outline the credit agreement you have with your customer. These terms can include the payment due date, penalties for late payments, and guidelines for when credit can be extended.

Collections methods

Collections methods indicate the actions your business can or will take if customer payments are not fulfilled. Typically, businesses will seek initial payment with an invoice, followed by a reminder, and later, legal action and pursuit with the help of a collection agency.

How to offer credit to your customers: Best practices

If you plan to offer credit to your customers, consider these best practices.

1. Check the customer’s credit

When you allow customers to pay with a credit card, the credit card company assumes most of the risk if the cardholder fails to pay their bill. But when small business owners allow customers to pay on credit via check or invoice, the business takes on the risk of the customer’s bad debt.

To mitigate risk, some small business owners, or their credit department, will evaluate their customers’ creditworthiness before extending credit. You can run a credit history check on customers through one of the three major credit bureaus, TransUnion, Experian, and Equifax.

2. Share your credit policy

Setting payment expectations with your customers from the start can help you avoid payment issues later on down the road. Before customers pay with credit, make sure they’re aware of your credit policy and agree with the payment terms. A documented policy ensures all parties involved understand the terms of the agreement.

3. Collect applicant information

Collect information from the customers applying for credit, including:

• Their full name, and DBA (Doing Business As) name if applicable
• The billing address
• Purchaser information, as well as business ownership information if applicable
• If a B2B transaction, you may also choose to collect: The type of business
• Financial statement
• Current assets and liabilities
• The value of equipment under lease
• A dated inventory count
• Insurance information
• Tax ID

This information can help you make informed decisions about whether you should extend credit, and how much you should offer.

4. Invoice the customer

Once you’ve decided to extend credit to a customer, invoices are your way of billing them for the products or services they purchase. An invoice typically includes the amount due, due date, payment methods, and information regarding your credit policy. Sometimes, customers are timely with their payments, while other times they need a reminder.

With QuickBooks accounting, you can easily generate invoices and schedule reminders to get outstanding balances sorted out ASAP.

How to offer credit to your customers: Best practices

If you plan to offer credit to your customers, consider these best practices.

1. Check the customer’s credit

When you allow customers to pay with a credit card, the credit card company assumes most of the risk if the cardholder fails to pay their bill. But when small business owners allow customers to pay on credit via check or invoice, the business takes on the risk of the customer’s bad debt.

To mitigate risk, some small business owners, or their credit department, will evaluate their customer’s creditworthiness before extending credit. You can run a credit history check on customers through one of the three major credit bureaus, TransUnion, Experian, and Equifax.

2. Share your credit policy

Setting payment expectations with your customers from the start can help you avoid payment issues later on down the road. Before customers pay with credit, make sure they’re aware of your credit policy and agree with the payment terms. A documented policy ensures all parties involved understand the terms of the agreement.

3. Collect applicant information

Collect information from the customers applying for credit, including:

• Their full name, and DBA (Doing Business As) name if applicable
• The billing address
• Purchaser information, as well as business ownership information if applicable
• If a B2B transaction, you may also choose to collect:The type of business
• Financial statement
• Current assets and liabilities
• The value of equipment under lease
• A dated inventory count
• Insurance information
• Tax ID

This information can help you make informed decisions about whether you should extend credit, and how much you should offer.

4. Invoice the customer

Once you’ve decided to extend credit to a customer, invoices are your way of billing them for the products or services they purchase. An invoice typically includes the amount due, due date, payment methods, and information regarding your credit policy. Sometimes, customers are timely with their payments, while other times they need a reminder.

With QuickBooks, you can easily generate invoices and schedule reminders to get outstanding balances sorted out ASAP.

5. Set up AR monitoring and follow-up procedures

Keeping track of unpaid balances is key to protecting your cash flow. An accounts receivable (AR) aging report can help you quickly spot overdue invoices and see which customers regularly miss payment deadlines. As a result, you’ll know when to step in before late payments become bad debt.

You can also simplify your collections process by automating payment reminders. Accounting software like QuickBooks lets you schedule reminders before and after due dates, so customers stay informed and you spend less time chasing payments. 

Plus, consistent follow-up shows customers you take your credit terms seriously.

Accounting for customer credit

Offering customer credit can be a headache without a good process. Streamline your credit sales with QuickBooks. QuickBooks accounting software makes it easy to keep track of unpaid invoices, monitor accounts receivable funding, and more. With QuickBooks AI agents, you can automate reminders, spot late payments early, and get actionable insights, so you stay ahead without extra effort.