# When to Stop Credit Sales to Late‑Paying Customers

Extending credit drives sales—until late payers turn it into an interest‑free loan at your expense. Knowing **when to pull the plug** on credit sales protects cash flow without wrecking customer relationships. This guide lays out clear triggers, a step‑by‑step escalation ladder, and best practices for Indian SMEs.

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## 1\. Why a Credit‑Stop Policy Matters

* **Prevents bad debts**—each extra day past due lowers recovery odds.
    
* **Signals professionalism**—buyers respect clear, consistent rules.
    
* **Protects good customers**—cash saved from chronic defaulters funds better terms for reliable payers.
    

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## 2\. Objective Triggers for a Credit Hold

| Trigger | Threshold | Action |
| --- | --- | --- |
| **Ageing Bucket Breach** | \> 30 % of account in 61–90 days, or any invoice 90+ | Freeze new orders pending payment plan |
| **Credit Limit Exceeded** | Utilisation > 110 % for 7 days | Suspend shipments until below limit |
| **Broken Promise‑to‑Pay (PTP)** | Two missed PTP dates in 60 days | Demand part pre‑payment before next delivery |
| **DPD Score Drop** | Bureau report shows new 60+ DPD mark | Immediate review; possible hold |
| **Cheque Bounce** | Two bounces in 3 months | Cash‑before‑delivery (CBD) only |

Set these thresholds in your ERP or **PayAssured** dashboard for automatic alerts.

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## 3\. Escalation Ladder Before a Full Stop

1. **Friendly Reminder** – call + email; attach invoice copy (Day 31 overdue).
    
2. **Second Reminder** – formal tone; highlight consequences (Day 45).
    
3. **Credit Limit Freeze** – halt further limit increases; allow existing orders to ship (Day 60).
    
4. **Partial Hold** – supply only against 50 % advance + 30‑day terms (Day 75).
    
5. **Full Credit Stop** – CBD or 100 % advance until ageing < 30 days (Day 90).
    

Document each step in the AR system; consistency is key.

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## 4\. Communicating the Hold

* **Be factual** – quote overdue invoices, dates, and policy clause.
    
* **Offer solutions** – part payment, instalment plan, credit‑insurance backed orders.
    
* **Stay professional** – avoid emotional language; focus on mutual benefit.
    

Sample email snippet:

> “As per Clause 5 of our credit policy, we must place your account on credit hold because Invoice #PA‑324 (₹1,57,400) is 92 days overdue. We can resume normal terms once outstanding falls below 30 days. Please find payment options attached.”

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## 5\. Legal Backing

* **MSME Act interest** – continue accruing 3 × RBI Bank Rate interest.
    
* **Contract clause** – include right to suspend deliveries for overdue accounts.
    
* **UCC‑style lien** – retain ownership of delivered goods until payment clears (add to T&Cs where applicable).
    

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## 6\. Reinstating Credit

1. **Clear overdue principal + agreed interest/fees.**
    
2. **Three consecutive on‑time payments** under reduced limit.
    
3. **Updated credit review**—financials, bureau score.
    

Gradually restore limit; consider tighter terms for six months.

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## 7\. Key Takeaways

* Define objective triggers—ageing, limit breaches, cheque bounces—to avoid ad‑hoc decisions.
    
* Use a staged escalation ladder; full credit stop is last resort, not first reaction.
    
* Communicate clearly, offer paths to reinstatement, and document every step.
    
* Digital tools like PayAssured automate alerts, holds, and reinstatement checks.
    

> **Remember:** Protecting cash flow today ensures you can serve loyal customers tomorrow.