How To Create A Credit Policy Guide For Your Business

Credit policies help business owners to standardize credit qualifications, terms, and procedures, and qualify and disqualify clients for credit. This way, organizations can protect themselves from delinquent payments and ensure a healthy working capital that meets current, short-term obligations. 

qualifications, terms, and procedures, and qualify and disqualify clients for credit. This way, organizations can protect themselves from delinquent payments and ensure a healthy working capital that meets current, short-term obligations. 

Notably, investing in a well-designed credit management system is best to strengthen your credit policy. This facilitates easy acquisition, monitoring, and approval of customers for credit. For example, you can automate the customer onboarding process with a digital trade application. Customers can fill in their personal information online, view credit terms and conditions, and sign and submit the application. 

Afterward, your finance team can view details and review the application before approval. Luckily, you can leverage online data like credit bureau reports to assess a customer's creditworthiness and payment behavior. Doing this ensures your company onboards quality customers without unacceptable financial risks. 

That said, below are six basic steps for developing a credit policy guide for your business. Read on!

1. Define Your Goals

Credit management affects every financial aspect of a business. Thus, outlining your goals is crucial as it aligns your team members with the common objectives you intend to achieve with a healthy portfolio of accounts. 

And when outlining these goals, ensure they're definitive and quantifiable. For instance, you can specify a target for the percentage of bad debts to sales. Also, you may aim to reduce a day's outstanding debts by a given rate. You can then develop credit policies that can help you accomplish these goals.

Also, remember to modify your objectives to adapt to changes in economic conditions and your company's financial requirements. 

2. Assign Roles And Responsibilities

It's necessary to define roles and responsibilities in your credit policy to maintain order in the credit approval process. Every department member should understand their role in credit management.

The following are some typical credit department roles:

• Credit manager: Responsible for the day-to-day management of the entire credit department

• Invoicing manager: Controls the daily operations within the billing department, including ensuring accurate invoicing, resolving invoice disputes, handling deductions, and other billing-related tasks

• Credit analyst: Obtains and analyzes credit reports for customers, especially those requesting high credit limits

• Billing clerk: Prepares and sends invoices to customers

• Collection specialist: Responsible for contacting past due accounts and accepting payment terms with the approval of the collections or credit manager

  
  

Additionally, when defining roles, it's essential to be clear about the authorization level. For example, you can dictate that credit managers are the only ones permitted to approve credit requests. This establishes clearer lines of decision-making in credit management.

3. Outline Credit Evaluation Criteria

Stating your company's credit evaluation criteria is vital to ensure unbiased and fair treatment of all clients. When developing this section, below are essential questions to answer: 

• What data will your team leverage to evaluate credit risk and determine safe credit limits? For example, you can use credit bureau reports, credit references, financial statements, public records, or other data shared by applicants.

• Will you utilize scoring models to assess high-volume credit requests? And should a customer fail the credit scorecard's criteria, what is the acceptable re-decision procedure?

With comprehensive credit evaluation criteria, you can focus on the right areas to assess the creditworthiness of applicants. That way, you can only issue trade credit to clients with a solid credit history or financial data showing their ability to repay debts effectively. 

4. Define Your Terms Of Sale

Having the same terms of sale across the board may not be a good idea. For example, extending net 30 terms to a startup and a larger company might not be the best move. The established business most likely has enough cash flow to settle its bills on time. On the other hand, the small company may face financial constraints and be unable to repay credit per the above terms. 

Thus, providing credit terms based on product and order types, ticket sizes, and deliverable dates is best. Doing this enables you to protect your rights as the seller and, at the same time, remain fair and impartial.

Notably, ensure to include the terms of sale in credit application forms with a section requiring the applicant's signature to ensure they've read and agree to the conditions.

5. State You're Bad Debt Policy

Bad debts are common in every business. Regardless of how detailed your credit policy is, some clients may still default on payment. Thus, it's necessary to have a section outlining bad debt guidelines in your credit policy document. Clearly state when an account is considered delinquent and the actions you'll take if a payment becomes severely late. For example, you may consider hiring a collection agency to help with debt collection or sue the customer in claims court.

6. Measure Results

After implementing your credit policy, measure its effectiveness at least quarterly. Evaluate its impact on sales and cash flow and modify the policy based on your findings.

Conclusion

Your credit policy guide is crucial to your business's credit management processes. Having one can help your organization safely onboard and extend credit to suitable customers, minimize your credit risk, and improve cash flow. Therefore, consider following the above steps to create a formal credit policy document for your business.