A Beginners Guide To Credit Policies

Do you have a credit policy for your business? If you do, do you understand it? Don’t worry if your answer to either of those questions is ‘no’, because you won’t be the only one. Credit policies are a critical part of running a successful and streamlined finance department, but often businesses wait far too long to actually implement them. So to show you why any business of any size needs a credit policy, we’re going to go over the what’s and whys of credit policies.

What Is A Credit Policy?

If your business operates any kind of credit agreement with your customers, like lines of credit for purchasing or delivery before payment, then you need a credit policy in place. It’s a simple concept that protects your business, your investment in debtors and maintains the lowest level of receivables – all of which are necessary to make sales in a healthy business. Your credit policy should be a written process for credit management and used to inform all credit based decisions that can maximise profit while also minimising risk.

What Should Be In Your Credit Policy?

Your credit policy shouldn’t be a huge list of requirements, written in such dense legalese that no one can understand it. It should be an accessible document, sent out to all prospects and new clients, and used as part of the induction process for all new members of the credit team. You also don’t need to detail every single procedure – just summarise the key points and save the minute detail for another document. This guide is about creating your base policy, and not about hashing out the fine details. As such, your policy should include:

• Credit assessment protocols, and the granting of credit limits
• Collections processes
• Authority levels (credit limit, transactions, and bad/doubtful debt)
• Payment collection, allocation, and application

Define Your Procedures

A large component of your credit policy should be defining the procedures credit managers need to go through. It should be a single, easy to access document within the finance department, and outline your businesses specific processes for:

• Customer credit applications
• Credit limits
• Reporting structure to ensure compliance during credit applications
• Payment terms (both default and circumstances for unique terms)
• Terms and conditions of sale
• Order applications and release of suspended orders
• Collections performance and targets
• Collection procedure
• Query dispute & control
• Debt recovery and bad debt write off
• Refusal/withdrawal of credit

This should cover 99% of the situations you will encounter in day-to-day business, but you can customise your credit policy to include extra sections if needed.

If You Don’t Have A Credit Policy

We know what you’re thinking – that all sounds very complicated! The good news is it doesn’t have to be, especially if you start with a template. But it is important to have a formal credit policy in place, no matter what size your business. This is simply because as your business grows, more people will be brought on board and processes that seemed simple in your head will become complex. Without a written policy in place your credit control department are essentially flying blind, and you will end up with some wildly erratic payment management and credit control procedures. On top of that, to having a credit policy in place can cause:

• Miscommunication and misunderstanding that will ultimately lose you money
• Loopholes that could allow clients to pay late or not at all
• Problems claiming money owed to you, particularly through the court system

If you’re struggling to understand your credit policy, or you need some support in writing one, we would love to help. At Debtcol, we don’t just help you recover existing debts – we can also help you put policies in place to minimise late payments in your business. If you would like to know more, just get in touch with the team today and book your free consultation.