How to Create a Credit Policy

Companies that offer credit before they first put a credit policy in place may find themselves burdened with uncollected debt or with cash tied up waiting for payments. Today's customer likes to be offered the convenience of paying with credit. Extending credit to your customers can quickly expand your customer base. In addition, customers paying with credit tend to spend more than their cash-paying counterparts.

Instructions

Difficulty: Moderately Easy

Create a Credit Policy

1. Understand the purpose of a credit policy. A credit policy is essentially just a consistent set of rules for deciding which of your customers is credit worthy.
2. Decide on how much of your cash you are willing to set aside to cover credit purchases. Some owners don't realize that they are really financing purchases with cash out of the company's pockets. Don't allocate so much of your capital for credit that your company has to borrow money to cover its ongoing expenses.
3. List the factors you will consider when deciding whether to give a customer credit.
4. Consider how much credit you are willing to extend to individual customers. Start all but your most credit worthy customers with lower amounts that build as they prove their ability to pay on time.
5. Decide on your credit terms, including the length of time for which credit will be offered, how late paying customers will be notified, the penalties for late payments and when you will write off bad debts.
6. Have your credit policy written up by your attorney or a credit professional and then reviewed by you and your attorney.
7. Put the policy into practice. Apply your credit rules to all customers. Enforcing the rules inconsistently is not only bad for business, but also illegal.
8. Test your credit policy in real time. Track the results looking for the impact credit has on your your sales and cash reserves.
9. Analyze the data. Look for trends which may indicate if your policy is too strict or too lax.
10. Revise your credit policy based on your findings. If you are having too many slow or no-pays, or if too much of your money is being tied up in credit, create new guidelines.
11. Experiment with using incentives to balance out your cash and credit sales. Offer discounts for paying with cash if you have too many credit customers. Extend low interest rates to your good credit customers to encourage them to spend more using credit.
12. Monitor your sales constantly. Tweak your credit policy as necessary to keep it an efficient tool for increasing sales.

Tips & Warnings

• Confront slow payers head on. The longer an account remains on your books unpaid, the less chance there is of collecting it.