Credit policy is designed to protect a company against the financial risks caused by customers who can’t pay on time or at all. At its most basic, a credit policy determines which customers are extended credit, sets payment terms, defines credit limits, and directs how delinquent accounts will be managed. The following tips will help you create a robust credit policy for your business.
Factors to Consider When Creating a Credit Policy
When creating a credit policy, it is important to consider several factors:
Business Goals: Is topline growth important, and are you willing to extend more credit to achieve that goal, or is profitability more important? Look at your revenue, expenses, and sales patterns to figure out how much credit you can afford to extend. Extending too much credit can be risky but extending too little credit can stifle growth.
Customer and Product Mix: Are your customers mostly large corporations, small businesses, or a mix? Different types of businesses can have different payment patterns, processes and risk levels. Similarly, different types of orders and products may require different terms of sale. Your credit policy should be flexible enough to accommodate these nuances.
Roles and Responsibilities: How do you want to divide responsibilities between sales, credit, and collections? Who should be responsible for getting the customer to complete the credit application? Who should communicate approvals and credit limits back to the customer? Who should follow up with delinquent accounts? Clear roles and responsibilities are critical to ensuring a smooth credit process and a positive customer experience.
Essential Credit Policy Elements
Your credit policy should be well documented and reviewed on a regular basis. Every six months is recommended. However, if there are significant changes in the economic climate or customer payment patterns, you should update the policy more frequently. A robust credit policy should include, but is not limited to, the following elements:
- Defined roles and responsibilities for all involved in the credit process
- Documentation required for credit application/file
- Methods/approved sources for gathering credit information
- Time limits for credit decisions
- Terms of sale
- Preferred payment methods (i.e. ACH, credit card, etc.)
- Procedure for communicating the credit decision/limit to internal stakeholders and the customer
- Procedure for handling disputes on billed amounts
- Triggers/criteria for account reviews
- Procedures for handling slow-paying accounts
- Penalties imposed for late payments
- Collections policy
- Litigation policy
Follow these tips and you will be well on your way to developing and implementing a robust credit policy to protect your business. Contact us to discuss how you can incorporate these tools into your credit policy.