Revisiting Credit Terms: When and How to Tighten Terms Without Harming Customer Relationships

In today’s economy, the phrase Revisiting Credit Terms takes on added weight. With slower growth, vulnerable sectors, and tighter credit flows across Canada, it’s smart to review—yet risky to change—your payment schedules, credit limits and terms without disrupting long standing customer relationships. In this article, we’ll walk through when you should tighten terms, how to do so respectfully, and how to maintain the balance between risk‐management and relationship‐preservation.

Recognize the Need to Review Credit Terms

When business is strong and cash flow predictable, many companies set credit terms and forget them. However, in a slowing economy, conditions change. Receivables that once rolled in reliably may now lag. Your customer base may be under pressure. By proactively revisiting credit terms, you protect your bottom line. But you must do so thoughtfully.

Key triggers to initiate a review include:

• A customer who has consistently paid on time begins to slip behind (e.g., 30+ days overdue when historically they were current)
• Your industry or region shows signs of stress (e.g., reported by government data or industry associations)
• Your internal credit‐loss ratios begin creeping up
• The macro environment signals caution (for example, slower economic growth, higher interest rates, cost pressures)

The time to act is not after the first major default—it’s when early warning signs begin to surface. In the private sector, best practice is to identify shifts in payment patterns, customer behaviour, or sector risks before they evolve into serious credit issues. Proactive credit reviews and timely follow-up are essential to prevent minor delays from becoming costly defaults.

Understand the Two Sides of the Equation

On one side you have your business’s interests: you need cash flow, you must minimize bad debt, and you must maintain operational stability.

• On the other side you have your customer relationship: many customers expect favourable terms, flexibility, or even bespoke arrangements especially long‐standing clients.

When you tighten terms abruptly or without context, you risk:

• Damaging loyalty and prompting customers to take their business elsewhere
• Creating friction or mistrust that may erode future opportunities
• Signalling that you suspect the customer of risk, which may trigger defensive behaviour

Therefore, the phrasing “Without Harming Customer Relationships” in your credit‐policy review is apt. The goal: reduce credit risk and keep your customer engaged.

Step‐by‐Step: How to Tighten Terms Respectfully

Here’s a practical roadmap for revisiting and tightening credit terms:

1.) Segment your customer base

• Identify which customers are higher risk (delinquencies, industry pressure, payment behaviour change)
• Also identify your strategic customers (high margin, high volume, long history)

2.) Analyze current terms & performance

• What are the existing credit limits, payment terms (Net 30, Net 60, etc.), early‐payment incentives, late fees?
• What is the actual payment performance (e.g., % paid on time, % > 30 days delinquent, average days sales outstanding)
• Compare to industry benchmarks, if available

3.) Define target term changes

• Consider reducing credit‐limit buffers for new orders
• Shorten payment terms for higher‐risk segments (e.g., move from Net 60 to Net 45 or Net 30)
• Limit open‐invoice amounts or require partial payment in advance
• Introduce or reinforce early‐payment discounts or late‐payment fees (compliant with provincial law)
• Require stronger documentation or guarantees for new credit extension

4. Communicate with the customer proactively

• Explain the change in terms as part of your standard review process (not targeting them personally)
• Highlight your mutual interest in stability and continued supply
• Offer to help them manage payment scheduling, early payment alternatives
• Provide lead time before the new terms apply (e.g., “Effective Jan 1” or “on your next order”)

5. Monitor and adjust

• After implementation, track customers under new terms closely: are payment behaviours improving?
• For key customers, maintain regular check ins to reinforce the relationship
• If a strategic customer shows risk signs, consider tailored arrangements (e.g., milestone payments) rather than blanket tightening

Legal & Regulatory Considerations in Canada

It’s essential to stay compliant while adjusting credit terms. Some considerations:

• Provincial limitation periods affect how long you can sue for unpaid amounts. For example, in Ontario the limitation period is 2 years.
• In Alberta, the Consumer Protection Act regulates what collection agencies and creditors can do.
• While tightening terms is generally permissible, any changes must be clearly documented and agreed to (especially if altering previously agreed‐to contracts).
• Maintain fairness and transparency in your communications to avoid harming your reputation and to preserve good will.

Tailoring Changes to Business‐to Business and Business‐to Consumer Contexts

For those that service both B2B and B2C receivables, you’ll want to adjust your approach accordingly:

For B2B

• Customers often expect credit terms; sudden changes may be disruptive. Use segmentation and provide explanations.
• Consider trade references, credit insurance, or partial financing for riskier accounts.
• Use contract terms and purchase orders to bind payment arrangements.

For B2C

• Consumers may react more strongly to term changes; you might shift toward upfront payments, shorter payment windows, or instalments.
• Compliance with consumer‐protection laws is critical (e.g., fair collection practices).

Pitfalls to Avoid

• Changing terms for all customers at once without differentiation: this may alienate good customers.
• Failing to communicate clearly: surprise term changes feel punitive.
• Forgetting to document new agreements or not updating contracts.
• Going too far too fast: tightening terms so much that sales drop or customer churn increases.
• Ignoring underlying root causes: term changes alone won’t fix a customer with a structural cash‐flow issue.

Summary

Revisiting credit terms is not simply an act of risk‐aversion—it’s a strategic lever for preserving your company’s bottom line while maintaining healthy business relationships. In a slower economy, such as Canada faces in late 2025, proactive term management can make the difference between thriving and floundering. By following a structured approach— segmentation, analysis, respectful communication, tailored changes, and careful monitoring—you safeguard cash‐flow without harming customer relations. At CGI Credit Guard, we’re here to support your strategy with actionable insights and expert support.

Helpful Resources

• Contact us
• How to Boost Cash Flow with Better Receivables Management – BDC Learn how reducing receivables delays and managing terms strategically can improve your company’s financial stability.
• Free Guide: Cash Flow Management – Business Development Bank of Canada (BDC) This comprehensive guide walks through receivables analysis, payment policy, and strategies to control working capital.