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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:

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: