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).