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 that get reviewed on a schedule against actual trading, and an override that is recorded with a name against it — so exceptions remain 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	₹5 lakh at 15 days is a different situation from ₹5 lakh at 120
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 ₹2 lakh of headroom and ₹3 lakh of orders in the pipeline, the headroom figure is fiction. Committed-but-undispatched value has to be included or the number is worse than no number.

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, which usually means an unresolved scheme claim or a quality dispute nobody escalated, and payment timing that is drifting — a dealer who paid at 30 days last year and 55 this year is telling you something before they stop paying entirely.

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.

India’s 45-day rule ties tax deductibility to paying micro and small enterprises on time. Introduced as Section 43B(h) of the Income Tax Act 1961 with effect from 1 April 2024, it now sits at Section 37(2)(g) of the Income-tax Act 2025 from 1 April 2026. Most guidance online still refers to the old section number.

The mechanics that matter:

• 15 days without a written agreement, up to 45 days with one. An agreed credit period longer than 45 days is not effective for this purpose — 45 days is a ceiling, not a default.
• Disallowance applies where the amount is overdue and still unpaid at 31 March. Paying after the deadline but before year end preserves the deduction.
• Paying before your return is filed does not rescue it. Unlike most of Section 43B, this clause is excluded from that relief — the deduction moves to the year you actually pay.
• Interest under the MSMED Act runs separately, at three times the RBI bank rate compounded monthly, and it is not deductible.

The nuance most articles miss: this applies to micro and small enterprises registered as manufacturers or service providers, not to traders. Most dealers and distributors are traders, so it frequently does not apply to what you owe your channel. It very likely does apply to small suppliers, job workers and service providers on your purchase ledger — which is where the exposure sits for most building materials businesses.

Practically: know which of your vendors are registered micro or small enterprises, flag them in your system, and clear those balances before 31 March even if it means paying others later.

Last verified: 22 August 2026. This is a summary of a rule that changes, not tax advice. Thresholds, deadlines and section numbers under this legislation have all moved in recent years — verify 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 that are registered 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.

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.