Managing dealer credit without stopping the business

Dealer credit is not decided in a monthly review. It is decided at a counter or a despatch desk, several times a day, by someone who needs to know whether to release goods against an account that is already overdue. If that person cannot see the current position in a few seconds, they will either hold up a good customer or ship to a bad one.

Everything else about credit management is downstream of that.

Why do credit limits stop working?

Because they are set once and then routinely exceeded, until the limit stops carrying meaning.

The pattern is familiar. A dealer’s limit is set on appointment. Their business grows and the limit does not. They exceed it, someone approves the order because the relationship is good, and that becomes the norm. Within a year the recorded limit bears no relation to actual exposure, and the person at the despatch desk has learned to ignore it.

A limit that is regularly overridden is not a control. It is a formality that makes everyone feel the risk is managed.

The fix is not stricter enforcement. It is limits reviewed on a schedule against actual trading, and an override recorded with a name against it — so exceptions stay visible rather than becoming invisible practice.

What does the despatch desk actually need?

Four numbers, on one screen, current as of now.

Number	Why it decides the call
Total outstanding	The headline exposure
Overdue amount, and by how long	A balance at fifteen days is a different situation from the same balance at four months
Limit and remaining headroom	Including orders placed but not yet dispatched
Recent payment behaviour	A dealer who always pays late but always pays is not the same risk as one who has stopped

The third row is where systems most often mislead. If a dealer has headroom on paper but more than that value already sitting in undispatched orders, the headroom figure is fiction. Committed-but-undispatched value has to be included, or the number is worse than no number — because a wrong figure gets trusted where a missing one gets questioned.

How should ageing actually be read?

Ageing buckets tell you the shape of a debt, not just its size — and the shape is what predicts recovery.

A dealer with a large balance spread evenly across recent invoices is trading actively and paying in cycle. A dealer with a smaller balance concentrated in one old invoice has a dispute, a cash problem, or an unresolved claim — and that one is the higher risk, despite the smaller number.

Two things worth watching that a total never shows.

An oldest invoice that never moves. This usually means an unresolved scheme claim or a quality dispute that nobody escalated. The balance is not a payment problem at all, and chasing it as one makes the relationship worse.

Payment timing that is drifting. A dealer who settled in about a month last year and takes nearly two now is telling you something well before they stop paying entirely. Almost nobody tracks the trend, because the outstanding total looks stable while it happens.

Where does the law come into this?

On the other side of your ledger — what you owe, rather than what you are owed — and it catches people out.

Indian tax law ties deductibility to paying micro and small enterprise suppliers within the time limit set by the MSMED Act. Miss it, and the deduction moves to the year you actually pay rather than the year the expense was incurred.

Three features make it sharper than businesses expect, and they are worth understanding even though the specifics belong with your chartered accountant.

The permitted credit period is capped. A longer period agreed between the parties does not extend it for this purpose — the statutory ceiling applies whatever the contract says.
There is no relief for paying before you file. Most provisions of this kind let you preserve the deduction by settling before the return is due. This one does not. Once the deadline passes, the deduction shifts to the year of payment even if you settle immediately afterwards.
It is tested at year end, and being unpaid is not enough. The amount must also have passed its deadline. An invoice accepted close to year end with a valid credit period may be outstanding without yet being overdue.

Separately, interest can run on delayed payments to these suppliers under the MSMED Act, and it is not deductible.

What to do about it is straightforward, and it is a systems job rather than an accounting one. Establish which of your vendors are registered micro or small enterprises, flag them in your purchase ledger, and clear those balances before year end even if it means paying others later. Your chartered accountant will tell you which suppliers qualify and what the current deadlines and section references are — the useful thing is that your system can already identify them when they ask.

This is a general explanation, not tax advice. Section references and deadlines under this legislation have moved in recent years — confirm the current position with your chartered accountant before acting on it.

What should a credit system do?

Show live exposure at the moment of order release, including undispatched commitments
Record every override with who approved it and why
Prompt limit review on a schedule, rather than waiting for a problem
Flag drifting payment behaviour before it becomes a default
Let dealers see their own position, which prevents a large share of disputes
Link unresolved claims to the invoices they are blocking
Flag vendors registered as micro or small enterprises on the payables side

Letting dealers see their own ledger is the one most businesses resist and the one that pays back fastest. A meaningful share of overdue balances are not refusals to pay — they are invoices the dealer disputes, or scheme credits they believe are owed and are informally netting off.

Common questions

Should we stop supply to overdue dealers?

It is the strongest lever you have and the most expensive to use badly. Stopping a dealer who is trading well and paying slowly can push them to a competitor permanently. The judgement needs the ageing shape and the payment trend, not just the outstanding total.

How do we set a limit for a new dealer?

Start low and review early rather than estimating generously. A limit raised after three months of good behaviour builds the relationship; one set high and then cut damages it.

Can we charge interest on overdue balances?

Contractually yes, if your terms provide for it. Commercially it is often waived to preserve the relationship, which is fine — but track what you waived. Businesses are frequently surprised by the annual total.

Does giving dealers visibility of their ledger cause more disputes?

It surfaces disputes earlier, which feels like more. They existed already — as silent non-payment. Earlier is considerably cheaper.

Which of our suppliers does the MSME payment rule cover?

Ask your chartered accountant, because it depends on how each supplier is registered and that is not something you can infer from their size or what they sell. What your system should do is hold the answer once you have it, so year-end payables can be sorted by it rather than reviewed by hand.

More on this: the scheme settlement problem and why your dealers do not use the app. For how we work with the channel, see distributors & dealers.