Assessing a customer's credit risk before you extend credit

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Why assess at all

Every credit sale is a loan. Businesses that would never lend ₹20 lakh to a stranger extend it in receivables to a new customer on the strength of an order. The assessment is not bureaucracy; it is the point at which most bad debt is either prevented or accepted. It also sets the terms — the limit, the period, the security — that the credit control process will later enforce.

Five sources of evidence

1. The registry and filings. Is the entity what it says it is — registered, active, with the directors it names? How long has it existed? Are its filings current? Are there charges on its assets, and to whom? Has it changed its name or its directors recently? All public.
2. A commercial credit report. The bureaus' commercial reports show how the business has repaid its lenders, its outstanding credit facilities, and any defaults or write-offs reported by banks. Worth the fee for any exposure above a threshold you set.
3. Trade references. Two or three other suppliers, asked a specific question: how many days beyond terms does this customer typically pay? Suppliers tell each other the truth about payers.
4. Conduct at onboarding. Does the customer provide GST and registration details promptly, sign the credit application without editing the terms, name a finance contact who replies? Friction here predicts friction later.
5. Payment behaviour. The best evidence, available only after the first invoices — which is why the first limit is small.

Green flags and red flags

Green: a finance contact distinct from the buyer; prompt, complete paperwork; references that answer in days; a stable registered office and directors; a business that asks about your terms rather than ignoring them. Red: a large first order on credit from a new entity; a recently incorporated company with older directors' previous companies struck off; references that do not respond; reluctance to sign a credit application; a request to invoice a different entity from the one ordering; a customer whose own customers are known slow payers. None of these is disqualifying alone. Together they are a limit decision.

Setting the first limit

Low enough that a total loss is survivable, with a short review date. Raise it on evidence — three invoices paid within terms — not on order volume. Tie it to a credit block: past the limit, new orders hold until the account is cleared. A limit without a block is a suggestion.

Security where the exposure justifies it

Post-dated cheques (which give you the Section 138 route if they bounce), a personal guarantee from a promoter, a bank guarantee for large or long contracts, or simply shorter terms. Ask early; a customer who refuses security on a large first order has told you something.

Reassess

Once a year for every account, and immediately on a signal: a missed promise, a new dispute pattern, a change of directors, news of the customer's own receivables trouble. Reassessment is what keeps the limit honest — and what the DSO Reduction Programme builds into the weekly rhythm.

Sources and regulation

Thresholds, limitation periods and procedures change. This guide describes the position as generally understood at the time of writing and is not legal advice; confirm the current rule before acting.