A sample credit policy contains a number of elements that are designed to mitigate the risk of loss from extending credit to customers that cannot pay. The key parts of a credit policy are as follows:
Purpose: This section of the policy briefly states why the policy exists. For example:
This policy outlines the requirements for establishing payment terms with the company’s customers, as well as the monitoring of those terms. The policy also notes alternatives to be made available to those customers that do not qualify for company credit.
Scope: This section identifies the types of sales to which the policy applies. It may only apply to sales within a certain country or region, or to certain types of contracts or sales. For example:
This policy applies to all sales made within the United States, excluding sales to the federal government and state governments.
Policy: The main body of the policy can include a number of statements regarding credit policy, along with more detailed application information. For example:
The company will extend credit to customers if they meet its threshold criteria for the granting of credit. The basic form of credit is a maximum credit of $10,000, with no security interest. The maximum credit can be expanded with the approval of the credit manager. In situations where a customer’s ability to repay is in question, a personal, corporate, or bank guarantee may be required. All terms are net 30 days, with no exceptions if a longer payment term is requested.
The credit department will review the credit applications of all new customers to determine their worthiness to receive credit, and the amount of that credit. The credit level may be reduced if a customer has a low credit score on the credit report, if it has been formed within the past two years, or if its current ratio is less than 1:1.
The credit department will periodically review the repayment history of existing customers to determine whether their existing credit levels are reasonable, or need to be revised. This review shall also be conducted whenever business conditions warrant a general retraction or expansion of credit levels.
Responsibility: The policy should state who has responsibility for the extension or revision of credit. Otherwise, the situation can be quite muddled, possibly resulting in credit being granted in an ad hoc manner. For example:
The credit manager is authorized to extend credit to customers, and to communicate with them regarding their credit status. The credit staff is also responsible for instructing customers regarding their payment responsibilities.