A company’s policy on when its customers should pay for goods or services they have ordered a government’s policy at a particular time on how easy or difficult it should be for people and businesses to borrow and how much it should cost. Trade credit is probably the easiest and most important source of short-term finance available to businesses.
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.
Objectives of trade credit are:
(a) Effectively outlines policies and procedures that will help provide your customers with options when they cannot pay in full.
(b) Implements a plan that will enable your business to adequately provide reasonable credit limits for your customers that have revolving credit accounts.
(c) Outlines the steps to take to collect from past-due or late paying customers and how to eliminate bad debt.
(d) Provide guidelines to legally collect money that k due to your company from slow or non-paying customers and from bad checks.
(e) This is short-term finance that is relatively quick to arrange. The typical amount involved and the terms will depend entirely on your trading activity. The reverse is also common, where a business’s customers or clients will request trade credit terms.
These are the Objectives of trade credit. A credit policy is necessary to show the company’s intended way of doing business and avoids confusion and potential misunderstanding.