A new customer calls you. They want to buy $12,000 a month, starting now, on 30-day terms. It sounds like the account you were looking for. You give them credit, ship the first order, and the second, and the third. By the fourth month they owe you $40,000 and stopped answering the phone.
That customer never intended or had the capacity to pay you on time, and the signals were there from the first call. Rush to buy a lot, immediately, on credit, having never worked with you. It is one of the clearest risk profiles, and you took it because you had no process to evaluate whether a new customer will pay.
Granting credit to a new customer is lending money to someone you do not know. No bank would do it without evaluating first. Neither should you. And evaluating does not mean distrusting everyone or scaring off good customers; it means having a process that distinguishes the customer who will pay from the one who will not, before you expose yourself.
Here is how to know, before shipping, whether a new customer will pay you.
1. Start Conservative and Let History Open the Door
The most important rule of credit to new customers: do not give a stranger the treatment you give a proven customer. The new customer has not demonstrated anything yet, so the risk is maximum. The way to handle it is to start conservative and expand credit as the customer builds payment history with you.
First sales cash, or with advance, or with a low credit limit. Each on-time payment earns more credit. A customer who really will pay has no problem with this; they understand that trust is built. The customer who demands broad credit immediately, with no history, and gets annoyed when you propose starting conservative, is giving you valuable information.
How to do it: Define a progressive credit scheme for new customers. Cash or advance at first, or a low limit. The limit grows with each fulfilled payment cycle. That way the risk is maximum only at the beginning, when you know the customer least, and drops as the customer demonstrates their behavior. This principle is the core of a good credit policy, which we cover in depth in how to extend terms without destroying your cash flow.
2. Ask For and Verify Trade References
A customer already operating in the market has a trail: other suppliers they buy from, whom they pay (or do not). Those trade references are the best prediction of how they will pay you, because they describe real behavior, not promises.
The common mistake is not failing to ask for references, it is asking for them and not verifying them. A customer can give three names; the value is in calling them and asking the right things: how long have they worked together? do they pay on their date? have they had delays? would they keep selling on credit? A supplier who has had bad experiences will frequently say so, or their tone will say it for them.
How to do it: Ask for two or three trade references from every new customer requesting credit. Call them. Ask about concrete payment behavior, not general impressions. A customer who refuses to give references, or who gives references that do not respond or speak with reservations, is a warning sign.
3. Review the Health and Track Record of the Business
Beyond references, the capacity to pay depends on the health of the customer’s business. An established business, with years of operation, real facilities, and a verifiable track record is very different from a newly formed one, with no history, that appears asking for broad credit.
This does not mean a new business does not deserve credit, many are legitimate and will grow with you. It means credit should be proportional to what you can verify. The less verifiable history, the more conservative the credit.
How to do it: Verify the real existence and track record of the business: how long it has operated, whether it has real facilities and inventory, its formal registration, its reputation in the sector. On large accounts or significant credit, ask for financial information or statements that support the capacity to pay. The formality of this verification scales with the size of the credit at stake, just as in corporate procurement and tenders, where supporting documentation is an entry requirement, as seen in how to sell to tenders and corporate procurement.
4. Read the Warning Signs in Behavior
Some behaviors, from the first contact, predict payment problems. They are not a guarantee, but they are signals an experienced distributor learns to read:
Excessive rush to buy a lot on credit immediately, having never worked with you. The customer who wants maximum credit on the first purchase is the profile from the example that opened this article.
Resistance to giving references or basic information. A legitimate customer understands that you evaluate; one who takes offense or evades usually has something to hide.
Recently changed suppliers without a good reason. Sometimes it means they burned the credit with the previous one. It is worth asking why they left their previous supplier.
Aggressive negotiation of terms before the first purchase. The customer focused on stretching the term to the maximum before buying anything will frequently be the one who stretches payment afterward.
How to do it: Do not ignore your instinct when behavior does not add up, but back it with process. Warning signs do not mean rejecting the customer; they mean starting more conservative and verifying more before exposing yourself.
5. Match Credit to Value and Risk, Not Just the Sale
The temptation with an attractive new customer is to give them all the credit they ask for to win the account. But credit should reflect risk, not enthusiasm for the sale. A new customer asking for $12,000 a month on credit with no history represents a different risk than one starting with $2,000 and growing.
You can win the account and protect your exposure at the same time, by structuring the start: first purchases cash or with partial advance, moderate initial limit, and credit growth tied to history. The customer who really will be good grows within that scheme without problem. The one who was going to fail reveals themselves before the exposure is large.
How to do it: Set the initial credit limit according to what you verified, not according to what the customer wants to buy. Structure the start to limit your exposure while the customer demonstrates their behavior. Win the account with service and availability, not by giving away unverified credit.
Want a Process to Evaluate New-Customer Credit?
At IVOR Bearings International we help distributors structure their credit policy and new-customer evaluation process to grow without accumulating uncollectible receivables. HERE we work on it with you. Or email ventas@ivorbearingsint.com with how you evaluate new customers today.
The Regional Example: The Big Account That Was Not
A distributor in the Dominican Republic received a new customer who wanted to buy $15,000 a month on 45 days, starting immediately. It was, on paper, the best new account of the year. The salesperson wanted to close it right away.
Instead of granting full credit, the distributor applied its process: it asked for three trade references and called them. Two responded with reservations; one said directly that the customer paid with 60-90 days of constant delay. It verified the business: it had operated only eight months and had changed two suppliers in that time.
The distributor did not reject the customer. It offered to start cash, with the possibility of credit after three months of history. The customer got annoyed and went to buy from a competitor on credit. Four months later, that competitor was chasing $50,000 of uncollectible receivable from that same customer. The process did not cost the distributor a good account; it saved it a $50,000 loss.
The Balance: Process Without Paranoia
Evaluating new-customer credit does not mean distrusting everyone or putting up so many barriers that you scare off good customers. Most new customers are legitimate and will pay well. The process exists for the percentage that will not, which is the one that can cost you thousands.
A good process is proportional: fast and light for small credits and verifiable customers, more rigorous for large credits and customers with no history. That way it does not friction good customers with excessive procedure, and it does protect your exposure where risk justifies it. The good customer understands a reasonable process; the customer who takes offense at a basic verification is telling you something.
Your Action Plan
- Define a progressive credit scheme for new customers. Cash or low limit at first, growing with demonstrated payment history.
- Make reference verification mandatory for every new customer requesting credit. Call them and ask about concrete payment behavior.
- Verify the business’s track record proportionally to the credit at stake. More credit, more verification.
- Learn to read the warning signs in customer behavior, and back them with process instead of instinct alone.
- Partner with commercial operations experts. At IVOR Bearings International we accompany distributors in structuring credit policies and customer evaluation that allow growth without accumulating uncollectibles.
Credit Is a Sale You Have Not Collected Yet
Every credit sale to a new customer is a bet: you bet they will pay. Without process, you bet blind, guided by the enthusiasm of an attractive new account. With process, you bet informed, knowing who you are lending to and how much risk you are taking.
The difference between the two distributors in the example was not luck. It was that one verified before exposing itself and the other got carried away by the size of the sale. The customer who will pay passes your process without problem. The one who was not going to pay reveals themselves before it costs you. That is the entire function of the process: not to reject customers, but to know which are which before shipping.
Contact IVOR Bearings International today. HERE we work on it with you. Or email ventas@ivorbearingsint.com with your current customer evaluation process.
Do not lend blind. Verify before shipping, and grow without accumulating uncollectible debts.
