Creating a Credit Policy
A written Credit Policy provides a structured approach to risk management and the debt collection process. A Credit Policy is essentially a consistent set of rules for deciding which of your customers is an acceptable credit risk. Organizations who extend credit prior to implementing a Credit Policy will inevitably find themselves with a large amount of unrecovered debt on their books.
It is critical to design your Credit Policy with the understanding that credit risk can be effectively managed, but not necessarily eliminated. Address the following questions as your guide to formulating your own organizations credit policy:
- When is a credit application required?
- What factors will you consider when deciding to extend credit to a customer?
- Must a credit application be signed, if so by whom?
- What are your standard terms of sale/credit? Ensure to include: the length of time credit will be offered, how late paying customers will be notified, the penalties for late payment and when a past due account is referred to a third-party collection agency.
- Under what conditions will a personal guarantee or some other form of security be required?
- What are the specific responsibilities of the sales and accounting departments?
- How frequently must the credit information be updated?
- What is the process for escalating problems involving uncooperative customers
- When is an account to be placed on credit suspension?
- When is an account to be referred to an external third-party collection agency?
- Who can accept a payment arrangement proposed by a customer?
- What are your procedures for minimizing delinquencies?
- What are your fraud prevention procedures?
- What is the process for addressing disputes?
In conclusion, to maintain a successful Credit Policy, it is important that it is regularly reviewed in conjunction with feedback from your sales and accounting departments.
From 18th century American Statesman, inventor, and writer Benjamin Franklin (1706-1790)
“Creditors have better memories that debtors; creditors are a superstitious sect, great observers of set days and times."
…Some food for thought.