Setting Credit Terms for a New Client
Module 3: Credit & Collections Basics, Chapter 1
The short answer
Before extending Net 30 or longer terms to a new client, ask for 2-3 trade references and check them, and consider a simple credit limit method like capping exposure at roughly 10% of the client's net worth if you can estimate it. Skipping this step is how a single bad client turns into your worst aging report entry.
Why does this step get skipped so often?
Because asking a new client to prove they're creditworthy feels awkward, especially for a small business excited to land the work. But this is exactly backward: it's far easier to set expectations and verify a client upfront than to renegotiate terms after an invoice is already 60 days overdue.
What should a credit check actually involve?
- 2-3 trade references, other vendors who've extended credit to this client. Ask each one: how long has the relationship run, what's the credit limit, and do they pay on time. A reference spanning at least a year is generally considered solid.
- A basic credit application, company details, requested terms, and reference contacts, in writing before work begins.
- A business credit report, where the client's size and relationship value justify the cost, from a bureau like Dun & Bradstreet.
How do you decide on an actual credit limit?
One simple, defensible method: the net worth approach. Many suppliers cap trade credit exposure at roughly 10% of a client's estimated net worth, a conservative baseline you can adjust up or down based on your own risk tolerance and how established the relationship becomes.
A prospective client's estimated net worth is $400,000. Using the 10% method, a starting credit limit of roughly $40,000 in open invoices at any time is a reasonable, conservative starting point, not a hard rule, but a defensible baseline to start from.
What's a red flag worth pausing on?
A trade reference where the credit limit was recently lowered by another vendor. That's a meaningful signal, someone who extended credit to this client got nervous enough to pull back. A raised limit over time suggests growing trust; a cut limit suggests the opposite, and it's worth asking directly what changed.
Do you need this level of rigor for every client?
No. A small invoice or a client with an existing track record doesn't need the full process. Reserve real diligence for new relationships and larger credit exposure, where getting it wrong actually costs you.
Quick check
Three questions. No email required, this one's just for you.
1. How many trade references should a business typically request when evaluating a new client?
2. Using the net worth method, what credit limit would you consider for a client with an estimated $200,000 net worth?
3. What does a recently lowered credit limit from another vendor suggest about a prospective client?
Frequently asked questions
What if a new client refuses to provide trade references?
That's itself useful information. Routinely refusing to provide references, or having none available, is generally treated as a caution signal, not a neutral non-answer.
Should credit limits ever be revisited after the relationship starts?
Yes, ideally annually or after any late payment. A limit set at the start of a relationship shouldn't be treated as permanent in either direction.
Is this process different for a client I already have a personal relationship with?
The temptation is to skip diligence based on trust, but credit decisions should be underpinned by data, not just the strength of a personal relationship, which protects both sides if the relationship ever gets complicated.
Sources
- Dun & Bradstreet, "How to Set Business Credit Limits"
- CreditPulse, "Credit References: The Complete B2B Guide"
- HighRadius, "What Is Trade Reference?"
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