4 Components of a Credit Policy

Designing your business’s credit policy

Business clients often prefer to be billed for purchases rather than paying upfront. That means you may need to establish receivable accounts for most business-to-business transactions. Unfortunately, it also means cash flow complications or worse if you take on commercial clients who don’t pay on time, or at all.

Luckily, you can minimize the risk of delinquent accounts by creating strong payment and credit policies. Consider these four methods:

1. Credit eligibility standards.

Research new clients by purchasing business credit reports or contacting credit departments in your industry. Before extending credit, confirm that they have made good on previous obligations.

2. Credit terms.

Consider industry practices and the creditworthiness of individual customers when crafting your policy. In some industries, new customers might start with a “net 30” standard, allowing them 30 days before payments become delinquent. But one size doesn’t necessarily fit all. Your best customers may warrant longer payment terms, such as 60 to 90 days. Some industries have their own billing practices, such as the construction industry, where customers are usually billed with a series of invoices.

3. Clear documentation.

Requirements for purchase orders, contracts, credit applications, sales agreements and invoices should all be documented and made clear to the client. The policy should include examples of each type of form, and specify the circumstances under which each would be appropriate and/or mandatory. Having formal procedures in place will make clear to your clients that you are diligent about the payment process and expect timely payment.

4. Collections.

Your policy guidelines should explain in clear language the steps you’ll take if an account becomes delinquent. You should provide information on late fees, charges, overdue notifications and when delinquent accounts will be reported to credit agencies and/or turned over to a collection agency.

A good credit policy will help you start to get a handle on your cash flow. Questions or want to talk best practices? Give us a call.
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