How To Create a Business Credit Policy [Free Template]

Why Do Businesses Need a Credit Policy?

An image provides 4 reasons why a company should create their own credit policy

It’s important for a business to have an established credit policy because it helps team members and customers to stay aligned on expectations. Without clear credit policy guidelines, a business is exposed to more risk, as many decisions will be left up to team members’ judgements, leaving more room for error and confusion.

Here are some ways credit policies can improve business operations:

Streamlines internal processes: Since a credit policy gives team members a standard point of reference for all credit decisions, they’ll spend less time asking for guidance. Team members can instead act decisively, knowing that their decisions are backed up by official company policy.
Improves customer accountability: Well-thought-out credit policies provide clear terms for customers to adhere to. They know when they’re expected to pay and understand the repercussions of missed deadlines.
Decreases default accounts: When a credit policy accounts for a customer’s current financial standing and payment history, a business can offer them a line of credit that’s easier to manage. Customers will then be less likely to overextend themselves.
Improves cash flow: A credit policy that reduces missed payments positively impacts other areas of operations, like cash flow, by giving the business a dependable revenue stream to plan around.

The function of credit policies is to create an effective plan of action that is mutually beneficial to the business and its customers.

What Influences a Credit Policy?

An image shares the 4 variables that should be considered when creating a credit policy

A credit policy is subject to a number of factors that can change from month to month and from customer to customer. Keep these credit policy variables in mind to give yours the greatest chance of success possible.

1. The Economy

Terms of credit are highly dependent on the state of the economy. If interest rates are anticipated to rise, your customers might be restricted from financing. If the economy turns into a bull market, customers may have more access to funds. Revisit your credit policy periodically to ensure the terms account for important changes to the economic climate at large and your industry in particular.

2. Your Cash Flow

Even when the economy is in good shape, your business can experience financial fluctuations. Account for potential increases or decreases to your cash flow when creating a policy. When your cash flow is high, you can entertain more lenient terms of credit. When cash flow is low, it may be smart to err on the stricter side.

3. The Customer

The customer is another variable and an effective credit policy will recognize their unique position. The size of a customer’s business, their number of clients, and their financial history will all play a role in determining their degree of risk.

4. Your Competition

A major benefit in offering credit to your customers is that it can give you a competitive edge over your competition. If your competitors also offer credit, then you’ll need to provide better, or at the very least comparable, rates to maintain this benefit.

What Makes Up a Credit Policy?

An image provides the 6 objectives a credit policy should address

While a policy needs to be tailored to your business’s goals, it’s important to address these common credit policy objectives:

Credit limits: What’s the maximum credit offering you feel comfortable giving to a single customer? How much credit is your business able to issue at one time without interrupting your cash flow?
Payment terms: Will you accept payments via credit cards, bank transfers, or checks? What is the maximum length of net terms you’ll allow? Will there be an interest fee or penalty for late payments?
Customer information: What will your business need to know about the customer? Is some information required while other information is optional?
Customer qualifications: What criteria must the customer meet for credit approval? How will their credit history or financial status impact the amount of credit they have access to?
Invoicing practices: What information will be included on invoices? How soon after the receipt of the goods or service will the invoice be delivered?
Collection terms: If an invoice goes unpaid, how long will you wait before involving an outside debt collector? When will you take a customer to court?

If your company operates in a niche industry, your credit policy should also address any unique factors that may impact its success.

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