Why You Should Consider Tightening Your Credit Requirements

The recent Federal Reserve’s Senior Loan Officer Opinion Survey found that banks tightened lending standards for businesses in the final quarter of 2024. As a result, AR teams should be increasingly cautious when extending credit in 2025. 

Here's five things to consider:

Re-evaluate Credit Policies

While more stringent credit limits can put you at loggerheads with sales, it may make sense to follow banks’ lead and reassess your own credit policies. Especially as customers lose access to bank financing, toughening your own credit standards can help mitigate the risk of non-payment.  

Enhance Customer Credit Evaluations

When onboarding a new customer, or one in a newly challenged industry (i.e., those exposed to new tariffs or inflationary concerns), you should be more careful in conducting thorough reviews of customers’ financial health before extending credit. This includes analyzing financial statements, payment histories, and credit scores to identify potential risks.

Monitor Existing Accounts

Even long-time customers should not be ignored. Consider implementing stricter monitoring of outstanding receivables to identify early signs of payment issues. Prompt follow-ups on overdue accounts can prevent minor delinquencies from escalating. When in doubt, best practice is to over-communicate with sales to make sure you’re on top of any payment risks.

Adjust Payment Terms

If you find reasons to worry about a customer’s creditworthiness, consider shortening payment terms or requiring advance payments. This approach can improve cash flow and reduce the risk of costly write-offs.

Diversify Financing Options

If you find yourself short on cash, explore alternative financing options, such as accounts receivable financing or asset-based lending, to prevent relying solely on traditional bank loans.  

In the end, it’s easy to assume that the reduction in interest rates in 2024 smoothed over credit worries. The reality is that the more banks continue to tighten credit, the more AR teams should proactively safeguard their organizations’ financial health.