Credit Policy

Definition: Guidelines that spell out how to decide which customers are sold on open account, the exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts

Though most consumers expect to pay cash or use a credit card when making a purchase, commercial customers typically want to be billed for any products and services they buy. You need to decide how much credit you're willing to extend them and under what circumstances. There's no one-size-fits-all credit policy--your policy will be based on your particular business and cash-flow circumstances, industry standards, current economic conditions, and the degree of risk involved.

As you create your policy, consider the link between credit and sales. Easy credit terms can be an excellent way to boost sales, but they can also increase losses if customers default. A typical credit policy will address the following points:

  • Credit limits. You'll establish dollar figures for the amount of credit you're willing to extend and define the parameters or circumstances.
  • Credit terms. If you agree to bill a customer, you need to decide when the payment will be due. Your terms may also include early-payment discounts and late-payment penalties.
  • Deposits. You may require customers to pay a portion of the amount due in advance.
  • Credit cards and personal checks. Your bank is a good resource for credit card merchant status and for setting policies regarding the acceptance of personal checks.
  • Customer information. This section should outline what you want to know about a customer before making a credit decision. Typical points include years in business, length of time at present location, financial data, credit rating with other vendors and credit reporting agencies, information about the individual principals of the company, and how much they expect to purchase from you.
  • Documentation. This includes credit applications, sales agreements, contracts, purchase orders, bills of lading, delivery receipts, invoices, correspondence, and so on.

For assistance, ask your particular industry's trade or professional association for guidelines. Part of your research should include finding out what your competitors' terms are and taking them into consideration when determining your own requirements.

An often-overlooked element in setting a credit policy is the design of invoices and statements. The invoice is the document that describes what the customer is being billed for; the statement is the follow-up document that indicates the status of the account. One collection and creditor rights expert says that invoices and statements that are clear, easy to read, and allow the customer to quickly identify what is being billed are likely to be paid faster.

Here are several points to include on the invoice:

  • An invoice number
  • An invoice date
  • A customer number or other identifying code
  • A complete and clear description of the product or service and item numbers, if appropriate. Avoid abbreviations your customer may not understand.
  • The customer's purchase order, job order or other reference information that will make identifying the invoice easier
  • The total dollar amount due, clearly indicated
  • Payment terms and due date (and specify any early-payment incentives or late-payment penalties).
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