Best Practices for Creating a Business Credit Policy

Posted by Ryan Howard on Sep 17, 2021 4:46:07 PM

Best Practices for Creating a Business Credit Policy

Within an accounting department, a credit manager's job is to determine the creditworthiness and credit risk of clients.  By setting up clients in this way, along with the implementation of a credit policy, your accounts receivable department can be more successful, cash flow is boosted and the risk of non-paying clients is reduced. 

Here are best practices for creating a business credit policy.

 

What is a Business Credit Policy?

Credit managers create these policies to help accounts receivable and collections because it rules out extending credit to those who may not pay their debts. Business credit, much like personal consumer credit, offers valuable client information such as:

  • Ownership, subsidiaries, and parent companies
  • Credit risk
  • Credit score and risk factors
  • Historical payment history
  • Bankruptcies and judgments

A credit policy determines credit limits, payment terms, and collections procedures based on an examination of the credit history and payment risk of the business.

Make Better Business Decisions with Credit Checks on Clients

Why are Business Credit Policies Important?

If you've ever issued an invoice after closing a sale or started work on a project prior to getting paid, then you're effectively working on credit. Other types of businesses, such as those with monthly retainers or subscription payment models, also work under the assumption that their clients will pay regularly.  When you're doing the work, providing the service, or sending the goods before you've been paid, then your business is running the risk of non-payment. A business credit policy will help protect your cash flow by holding your clients accountable for paying.

How to Create a Business Credit Policy

There may be an overarching credit policy that is used to define the role of credit managers and the credit department.  This policy will  clarify the following:

  • Purpose of the credit department
  • Roles and responsibilities of the credit department positions
  • Description of the credit application process
  • What information is required to evaluate business credit
  • How collections will be handled

The extension of credit and payment terms will be different for each client, depending on their creditworthiness and risk. Therefore, the following things must be examined and/or included when creating a business credit policy:

  • How much credit your business can afford to extend
  • Delinquent Accounts and Debt Collections Policy
  • Payment terms and conditions including:
  • Interest or Late payment fees
  • Discounts or early payment incentives
  • Invoicing or billing procedures
  • Accepted methods of payment

Working within the accounting department is essential to understand how much risk your business can afford to take. Offering credit to clients is helpful for building your business but a credit policy helps to protect your business along the way.  Be sure to include a trusted debt collections partner to help with those clients who aren't honoring their promises to your business. Let us know how we can help.HOW MUCH TO HIRE A  THIRD-PARTY COLLECTIONS AGENCY?

Topics: Best Practices, Accounts Receivable