How to Write an Effective Business Credit Policy

Published by

Jul 19, 2021

 

Most customers will pay using cash or credit cards, but some might offer payments through credit instead. This means that instead of paying for the item or the service upfront, the customers can choose to pay the amount later, either through a lump sum or several payment packages. This type of payment is quite popular in B2B relationships, but some B2C companies also offer it.

 

One of the first steps that businesses should consider doing is to write a business credit policy, which dictates how much credit you can offer to customers and how you will collect the undue bills. Without an effective policy, customers may abuse loopholes in order to avoid payments. Here is what you need to do to write a top-tier business credit policy.

Make the mission statement clear

Every policy should start with a mission statement that will clearly explain why it needs to exist. The mission statement should be as clear as possible to avoid confusion. It should be brief as well, and about 3-4 sentences should do.

Determine who the policy applies to

Businesses, especially small businesses, cannot offer credits to just about everyone. They will be very vulnerable to unpaid debts and missed payments. The most important thing to keep in mind is that not everyone has the goodwill to pay off their debts. Some customers, in fact, might have a very bad reputation when it comes to credits, and the policy should specifically exclude these people from paying with credits.

 

The problem is to find out who might have this bad habit. Checking customers’ credit scores or their past payment history is a good way to check their payment habits, but you will have to be careful with the legal ramifications. The Fair Credit Reporting Act requires you to get the customers’ permission before going through their credit scores.


https://unsplash.com/photos/67l-QujB14w

Define the credit limit

No one should be given unlimited credits. The next step is to define a credit limit so that the customers will not be able to abuse the system, and the business will be much less vulnerable to huge budget deficits in case of missed payments.

 

The problem now is to determine the exact credit limit. There is no single accepted credit limit among businesses. For some businesses, a limit of $10,000 per customer might be acceptable. For others, a lower limit of $6,000 might be a more reasonable choice. The bottom line is that you will have to calculate the credit limit yourself if you want to write an effective business credit policy.

 

Calculating the credit limit involves calculating your average liabilities and comparing them with your company’s current income. In short, you must predict at which point your company will not be able to pay off the liabilities. To do this, it is important to create accurate mathematical models so that the prediction is as accurate as possible. If you are not a tech savant, don’t worry. You can always order mathematical modeling instead.

 

Interestingly, you can also offer more varying degrees of credit flexibility to customers depending on their credit scores. Customers who boast better debt payment history may enjoy a better credit limit. That way, you will reward customers who do the right thing, encouraging better behaviors and espousing brand loyalty.