Credit Policy

The primary goal of a credit policy is to avoid extending credit to customers who are unable to pay their accounts. The credit policy for some larger businesses can be quite formal, involving things such as: specific documented guidelines, customer credit applications, and credit checks. The credit policy for most small businesses tends to be quite informal and lacks the items found in the formal credit policy of a larger business. Many small business owners rely on their instincts as their credit policy.

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.

Credit Policy

• The Finance Manager has overall responsibility for ensuring that granting of credit limit, as well as the total level of debtors, is properly controlled at all times.
• Each customer must be set a credit term on case by case basis, including the length of time for which credit will be offered, how late paying customers will be notified, the penalties for late payments and provision for bad debts.
• Accurate and up-to-date current status of credit accounts must be available to all staff.
• The Finance Manager must review an aged list of debtors each   week/month, together with reconciliation to the figure shown in trade/other debtors in the management accounts, and prepare a “stop list” of delinquent customers.
• The Accounts Executive is responsible for producing a weekly/monthly overdue debtors list. This should from part of the Company’s monthly management accounts presented to the Management.
• All appropriate customer facing staff must be aware of the up-to-date “stop list” of delinquent customers.
• All inter-company accounts must be reconciled on a monthly basis.