The Ultimate Guide to Creating a Robust Credit Policy

If you provide your customers with any sort of credit, you need to have a credit policy. This protects your company and even staff from the risks that could occur if customers repeatedly pay their invoices late (or fail to pay at all due to bankruptcy). 

It's vital that your credit policy is easy to understand, has been shared with your staff and that you've actually trained your employees on it. If they don't understand all the elements in your credit policy, you can be sure they might pursue business deals and work with suppliers who end up being unreliable, late payers. 

What is your tolerance and time-frame for collections?

Collections is inevitable when you are offering credit. Determine in the beginning how you will handle this. You may choose to grant more time, to have formal letters sent, to write off certain amounts, or a variety of other things. Figuring this out up front will make sure you are setting proper guidelines and can communicate them up front to all parties involved.  

Will this be done in house or will you outsource it? 

Collections doesn’t have to be done by your company. Determine now what your preference is and how you will handle this issue so that if you are going to outsource, that agency or law firm can help you craft the collections portion of your credit policy. 

What are the legal considerations for your state, country, or industry? 

Make sure to speak to a lawyer that is versed in credit to make sure that you are following all applicable local, state, and federal guidelines as it pertains to your specific business.  

What is standard in your industry? 

Use third party data to determine the terms that are standard in your industry. See what your competitors and partners are offering before unilaterally deciding on terms.  

How quickly do you need to see repayment? 

While understanding industry standards is important, in the end it is all about your company’s risk tolerance. How long are you able wait for repayment? This has to be factored in to the overall terms that you are willing to offer.  

How long can you actually last without getting paid? 

Repayment may not happen on time or at all. What percentage of the credit offered are you able to handle not receiving in a timely manner? Make sure that you have adequate time for collection built into your credit policy before you endanger the functionality of your business due to credit that was extended.  

Documentation 

Don't just wing it. Make sure you document everything that's included in your credit policy. For instance, provide key terminology and definitions that your employees may not be aware of. 

Also, provide clear explanations and examples of each element of the credit policy. For example, make it clear if there's a minimum threshold for business credit score that must be met by potential customers. Make sure the sales team knows what this is and why it's been set that way. That will reduce the likelihood of your sales team bringing you deals that are too risky for the business. 

Automated Decision-Making

Much of the credit process and many of the credit decisions that need to be made are common to particular businesses. If these decisions can be defined, then they can be automated. Automation allows for quicker and more accurate decisions and leaves more time to consider the harder or more complex applications. A strong credit policy should have provisions on how and when this is done as well as what type of system or software will be used to automate these processes.