Credit policy is designed to protect a company against the financial risks caused by customers who can’t pay on time or at all. At its most basic, a credit policy determines which customers are extended credit, sets payment terms, defines credit limits, and directs how delinquent accounts will be managed. The following tips will help you create a robust credit policy for your business.
When creating a credit policy, it is important to consider several factors:
Business Goals: Is topline growth important, and are you willing to extend more credit to achieve that goal, or is profitability more important? Look at your revenue, expenses, and sales patterns to figure out how much credit you can afford to extend. Extending too much credit can be risky but extending too little credit can stifle growth.
Customer and Product Mix: Are your customers mostly large corporations, small businesses, or a mix? Different types of businesses can have different payment patterns, processes and risk levels. Similarly, different types of orders and products may require different terms of sale. Your credit policy should be flexible enough to accommodate these nuances.
Roles and Responsibilities: How do you want to divide responsibilities between sales, credit, and collections? Who should be responsible for getting the customer to complete the credit application? Who should communicate approvals and credit limits back to the customer? Who should follow up with delinquent accounts? Clear roles and responsibilities are critical to ensuring a smooth credit process and a positive customer experience.
Your credit policy should be well documented and reviewed on a regular basis. Every six months is recommended. However, if there are significant changes in the economic climate or customer payment patterns, you should update the policy more frequently. A robust credit policy should include, but is not limited to, the following elements:
Follow these tips and you will be well on your way to developing and implementing a robust credit policy to protect your business. Contact us to discuss how you can incorporate these tools into your credit policy.
Eric Kider currently is the Senior Vice President/General Manager, Data & Credit Solutions. He is a highly motivated senior executive bringing more than 30 years of dedicated experience and a proven track record of driving significant revenue growth and margin improvement within, both, the financial and information services industries. Eric possesses expertise in all aspects of business management, including the development and oversight of sales, operations, product management, technology, and customer service. He holds a BS degree in Economics and Government from Skidmore College and took graduate courses at Sheffield Hallam University (Sheffield, United Kingdom).