Offering credit to customers is a powerful tool for growing sales, but it comes with significant risks if not managed properly. For Pakistani small businesses, the challenge is balancing the desire to win more business against the need to protect cash flow. A systematic approach to customer credit management helps you extend credit confidently while minimizing bad debt losses.
The Double-Edged Sword of Customer Credit
In Pakistan’s competitive business environment, offering credit terms can be the deciding factor in winning major accounts. Wholesale buyers, retailers, and B2B customers often expect payment terms of 30, 60, or even 90 days. Refusing to offer credit may mean losing business to competitors who will.
However, extending credit essentially means providing interest-free financing to your customers. Every rupee tied up in receivables is a rupee you cannot use for inventory, operations, or growth. When customers pay late or default entirely, the impact on your business can be severe. Effective credit management is about finding the right balance.
Establishing Credit Policies
Every business that extends credit needs clear, written credit policies. These policies should define who qualifies for credit, how much credit to extend, what terms to offer, and how to handle collections. Having documented policies ensures consistency and removes emotion from credit decisions.
Your credit policy should specify the documentation required for credit applications, approval authorities at different credit levels, standard payment terms, early payment incentives if offered, and consequences for late payment. Review and update these policies annually based on your experience.
Evaluating Customer Creditworthiness
Before extending credit, evaluate each customer’s ability and willingness to pay. For new customers, request trade references from other suppliers. Check how long they have been in business and verify their business registration. Start with conservative credit limits that can be increased as they establish a positive payment history.
For existing customers, their payment history with your business is the most valuable indicator. Customers who consistently pay on time deserve higher credit limits, while those with late payment patterns should face restrictions. Your accounting software should make this history easily accessible.
Setting Appropriate Credit Limits
Credit limits should balance opportunity with risk. A common approach is to set initial limits based on a percentage of the customer’s expected monthly purchases. As payment history develops, adjust limits accordingly. Never extend credit that would seriously harm your business if the customer defaulted.
Consider the customer’s industry and current market conditions. Some sectors face greater volatility than others. During economic uncertainty, maintaining conservative limits protects your business even if it means slower growth.
Managing Receivables Actively
Effective credit management requires active receivables monitoring, not just waiting for problems to develop. Review aging reports weekly to identify accounts approaching or past due dates. The sooner you act on late payments, the more likely you are to collect. Receivables older than 90 days become increasingly difficult to recover.
Using proper accounting practices ensures your receivables are accurately recorded and aged. Automated alerts when accounts become overdue help you take action before small problems become major losses.
Implementing Collection Procedures
Establish clear collection procedures that escalate appropriately. A friendly reminder before the due date often prompts timely payment. After the due date, a series of increasingly firm communications should follow a set schedule. Document all collection efforts as they may be needed if legal action becomes necessary.
Personal calls are often more effective than letters or emails for Pakistani businesses. Relationships matter in our business culture, and a phone conversation can uncover issues that written communication misses. Sometimes customers have legitimate temporary problems that can be resolved with adjusted payment plans.
Using Technology for Credit Control
Modern business software provides powerful tools for credit management. Automatic credit limit checks prevent sales exceeding approved limits. Aging reports show exactly which customers owe what and for how long. Payment history tracking identifies patterns that inform future credit decisions.
Integration between sales, inventory, and accounting systems ensures that credit information is always current. When a salesperson enters an order, they can immediately see the customer’s credit status and outstanding balance without separate inquiries.
Protecting Against Bad Debts
Despite best practices, some bad debts are inevitable. Protect your business by diversifying your customer base so no single customer represents too large a percentage of receivables. Consider requiring security deposits or advance payments from higher-risk customers. For very large orders, partial advance payment reduces your exposure.
Some businesses in Pakistan use post-dated cheques as a form of security, though their legal effectiveness varies. Whatever security measures you use, ensure they are properly documented and legally enforceable.
Handling Payment Disputes
Payment delays sometimes result from disputes rather than inability to pay. Quality issues, delivery problems, or invoice discrepancies give customers reasons to withhold payment. Address disputes quickly and fairly. Maintaining good records of orders, deliveries, and communications helps resolve disputes efficiently.
When your business is clearly at fault, take responsibility and work toward resolution. When the customer’s claims are unjustified, stand firm but professional. The goal is to resolve the dispute and preserve the business relationship if possible.
Credit Terms as a Competitive Tool
While managing risk is essential, remember that credit terms can also be a competitive advantage. Offering better terms than competitors can win valuable accounts. Early payment discounts (like 2% discount for payment within 10 days) can improve your cash flow while giving customers an incentive.
Understanding your cash flow patterns helps you determine what credit terms you can afford to offer. The cost of extending credit should be factored into your pricing decisions.
Training Your Team on Credit Policies
Everyone involved in sales and customer service should understand your credit policies. Sales teams especially need to know credit requirements so they can set appropriate customer expectations. Clear communication prevents situations where salespeople make promises your business cannot fulfill.
HysabOne: Complete Receivables Management
HysabOne provides Pakistani businesses with comprehensive tools for customer credit management. Set and monitor credit limits, track customer payment history, generate aging reports, and manage collections all from one integrated platform. Our software helps you extend credit confidently while protecting your cash flow. Real-time visibility into your receivables position supports better business decisions. Start your free trial today.