The goal of a credit policy is to define the rules and regulations about how your business extends and manages credit, credit risk, invoice collection. Furthermore, your business credit policy should also outlines what happens should there be a problem, a dispute, when legal action is required, etc. This can be an extremely helpful document for any company who sells on credit terms, provided it has been written correctly. A business credit policy can be as simple or as complex as you would like it to be, but there are a few things you’ll want to include to make sure it’s an effective tool.
WHAT’S THE PURPOSE OF YOUR BUSINESS CREDIT POLICY?
In short, your business credit policy should define procedures, document processes, and assign responsibilities to improve the entire process; from approving a customer for credit, setting limits, through to collecting the money they owe. Your credit policy will ensure that every situation is handled the way you want it handled in a timely manner to avoid future risk, while protecting your valuable customer relationships.
6 SECTIONS TO INCLUDE IN YOUR BUSINESS CREDIT POLICY
This document can be as detailed or as simple as you would like, but here are a few things you will want to make sure to include for an effective document.
- What is the purpose of this policy?
- define the steps for setting up a new customer for credit sales, including how you will assess creditworthiness.
- How will you set credit limits? Will all new customers have a credit limit of X? Or will you work on an individual basis determining their limit based on financial information and risk ratings?
- how will you set credit terms? Will there be consequences for late payment? Discounts for early payment? Etc.
- What are the procedures for collecting outstanding invoices? When should your customers make their first phone call, when should they send reminder letters, etc.
- What do you do when a customer falls into arrears? Is there a warning process, do you lower their credit limits? Take credit away completely?
If you plan to offer credit terms to your customers, don’t be tempted to skip writing a business credit policy; it will make the rest of the credit management process a lot easier and far more successful. If you don’t have a credit policy, or if you have not updated your policy in the last year or two, it’s time to get started.
A complete guide to developing a credit policy plan that will help you better manage your accounts receivable.
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