Invoicing Customers and Extending Credit

When and how to extend credit to your customers.

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An invoice is a bill that sets the terms for payment. If you're a professional service provider (such as a consultant or accountant) or you sell products to a wholesaler (a company that places your goods in retail accounts), then you probably invoice your customers. When you invoice a customer, your business is extending credit.

Extending Credit to Your Customers

You may not feel like you're extending credit -- after all, you're just waiting for payment -- but from a legal perspective, you're making an unsecured loan. (An unsecured loan is one in which the borrower does not pledge property as collateral for the loan.) The problem with unsecured loans is that they're unsecured. If the business doesn't have the money, it won't do any good to sue, because there will be nothing to recover. If the business goes bankrupt, you're out of luck.

If you have doubts about a new customer, you can check on their creditworthiness by having them complete a credit reference form. A good credit reference form requires information about who is in charge of the business, who to contact if problems develop, how much credit the applicant is seeking, other firms with which the company has done business on credit, and any other financial information you need to make your decision. If it's a big account and you're investing a lot of resources (time, money, or supplies) in it, it may be worth it to pay for credit research from a company such as Dun & Bradstreet (, BusinessCreditUSA (, or Equifax (

Evaluating Credit Risk

After a potential customer fills out a credit reference form, how do you tell whether the customer is a credit risk? That will be a personal call based on the size of the business and its credit history. Collections expert Timothy Paulsen suggests separating patterns from single events. If a customer has one or two minor credit blemishes -- perhaps the result of an unexpected growth spurt -- that should not necessarily be the basis of denying credit. That is different from evidence that indicates the client or customer just doesn't like to pay bills.

The greatest risk in extending credit is when you throw all of your business to one big account. The obvious problem with that strategy is that you risk losing a lot of money if the big account has financial problems or goes bankrupt. For that reason, don't ditch your smaller accounts because of large orders from one customer. Loyal smaller accounts give a business a constant, reliable source of income.

Preparing Your Invoice

When you prepare an invoice, it's important to provide an accurate, clear statement of the transaction and a request that the customer contact you if there are any problems. Most invoices require payment within 30, 60, or 90 days. Be sure to specify when payment is due. With this information clearly noted on the invoice, it may be more difficult for a slow-paying account to later excuse its delinquent behavior.

Want to Learn More?

For more information on laws you must comply with when extending credit, see Nolo's article Consumer Credit Laws and Your Business.

To learn about starting and running your own business, see Legal Guide for Starting & Running a Small Business, by Fred S. Steingold (Nolo).

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