Things to Consider when Writing Credit Policies

Writing a credit policy is different for every business. There are questions to be asked and considerations to be made to create a policy that protects the interests of the business and its customers.

In this post, we will discuss the key factors you need to look at when writing your credit policy. But first, let’s take a closer look at credit policies and what exactly they are used for in business.

What is a Credit Policy?

In simple terms, a credit policy is a set of guidelines that govern payment terms, particularly for B2B transactions. In most retail establishments, you rarely need a credit policy because immediate payments through cash or credit card are typically required.

Credit policies are essential risk management tools for businesses that deliver goods or services first before requesting for payments.

To start, a credit policy must clearly define four things:

  1. The criteria for customer qualification
  2. The TOC (Terms and Conditions) for delivering products or services on credit
  3. The process of collecting payments
  4. The necessary action(s) after customer delinquency

Looking at the list above, writing a credit policy may not be that complicated after all. However, a credit policy must be in tune with several factors such as the size of the business, its specific industry, and particular cash flow. You should also look at the current mood of the economy (global or regional – depending on the nature of your business).

Take note that making it easy to buy on credit may drive up sales, but it also increases risk. More active accounts mean more chances of nonpayment.

On the flip side, strict customer qualification or aggressive billing procedures may put off potential customers. But it does attract prospects who are serious about successfully transacting with your company. That said, you need to dig deep and conduct a thorough analysis to make sure your credit policy doesn’t undermine the profitability of your enterprise.

Writing an Effective Credit Policy

Obviously, there is no particular set of steps that can help you create a policy that’s tailored to your business. An expertly-written credit policy takes a lot of patience and time understanding your objectives, detailing out your billing procedures, and so on.

There are, however, general rules that can help you write an effective credit policy:

  • Focus on setting your credit limit(s). It must be made clear in exact dollar figures (or whatever currency you use) for each policy you wish to create.
  • Pay attention to your invoice structure. You can use an enterprise invoicing application to help with numbering, customer identification, and so on.
  • Provide clear steps for customers who may fail to pay. To increase the confidence of prospects, you should outline options should they find themselves unable to pay on time.
  • Establish a notification system. As the business requesting the payment, it is your duty to provide customers with quick reminders – especially if they’re already past due. You can use an automated system to save time and make collections easier.
  • Require deposits. If needed, you can request partial payments as a qualification requirement. This is a great strategy if you want to reduce risk further.
  • Don’t forget legal papers. A credit policy must be legally-binding. By acquiring and fulfilling the right legal forms, your business should be able to charge customers directly via credit or debit cards.
  • Consider write-offs for small charges. For some companies, it is entirely reasonable to write-off costs below $10.00 as bad debt. Just remember to provide step-by-step instructions for your employees to help them with these transactions.
  • Consider a third-party collection agency. 

Conclusion

Under the right circumstances, a credit policy will preserve the sustainability and growth of your company; it is not something you want to botch up. Pay close attention to every single detail and remember that problem with credit management can be very costly.

Posted in Finance, Cash Flow, Credit