As businesses grow and industries change, it often becomes necessary for you to extend credit to clients. This process allows you to do business with more customers since not all can pay at the exact sale or service time. Many business owners handle this process through an invoicing practice, which is beneficial for many different business types. However, this credit extension can put business owners at risk for missed or late payments when they don’t immediately collect the amounts due. It’s still a necessary risk because, by not accepting credit, owners may lose business to competitors who do allow delayed payment.
Well-formulated credit policies can help you avert nonpayment problems and operate your business more smoothly. Without policies in place, business owners can put themselves at even greater risks for failed payments.
Credit policies are beneficial and important for a variety of reasons, including1
- clarity. Keep business transactions transparent and allow everyone — including customers and employees — to know precisely what’s included in the line of credit standards.
- collection. Employ a credit policy to better collect on past-due bills.
- structure. Your credit policy will provide guidelines for your accounts receivable department members, which can help them ensure collected payments. It’ll also give employees a written policy they can rely on if a customer tries to find leeway.
- communication. The credit policy will allow for better communication within your own company and with customers in regard to who is responsible for what within the policy and repayment plan terms.
A good credit policy will vary from business to business, depending on standard credit terms and specific customer and industry needs, but most credit policies should include the following standard specifications:2
- Credit extension guidelines — The decision factors employees will use to determine who is eligible to receive credit may include credit scores, reference requirements, and other aspects affecting credit extension.
- Amounts — The credit amounts you’re willing to extend based on customers’ credit ratings and other relevant factors are also important.
- Terms — This section includes the credit extension length, applicable interest rate, and any other agreement terms.
- Past-due procedure — An explanation of past-due policies and procedures includes the credit timeline and any past-due account penalties.
- Collections — In the event of a past-due account, detail how to handle collections. For instance, will the business contract a commercial collections agency or manage the process in-house?
Credit policies can go a long way to ensure you and your employees handle the credit process effectively and properly for your business. If you need further assistance, MSCCM credit experts can assist you in creating and maintaining your credit policy.
1 Dunn, Michelle. 2009. “Why You Need a Credit Policy.” Entrepreneur. August 6. Source.
2 Entrepreneur Staff. “Credit Policy.” Entrepreneur. Accessed November 16, 2016. Source.