Credit Policy for businesses and how to extend credit and manage credit risk

Some business owners ask why do I need a credit policy? I don’t have much bad debt. The following will help you understand and decide if you want or need to implement a credit policy.

The objective of a Credit Policy should be:

1. To provide timely notification to customers regarding past due amounts, and therefore eliminating old balances from being carried on the receivables.
2. To outline a procedure that will provide customers with options when they cannot pay in full and on time.
3. To provide a procedure on when and what to do with small balances on customers accounts.
4. To provide a procedure that will enable a company to adequately provide reasonable credit limits for customers with revolving credit.
5. To provide guidelines to legally collect money due your company that was lost due to bad checks.
6. To have a system that will maintain timely contact with customers when they are past due.
7. To provide a procedure that will enable your company to keep credit card numbers on file for customers and automatically charge them when they place an order.
8. To have a procedure that will enable your company to be aware of when an account should be placed for collection and to avoid carrying bad debts on the receivables.
9. To provide a procedure that will enable your business to legally charge customers credit cards at the time they place an order.
10. To provide a procedure that will eliminate orders being held, and to better serve customers in a timely manner.
11. To have a procedure that will enable your business to be aware of when to write a balance off to bad debt.

It is my belief that every business should have a credit policy.