A credit policy checklist is a set of rules that explains how your business extends credit and how customers should expect to pay. It should cover due dates and grace periods, fees and interest rates, when credit can be refused, how credit limits are set, and how collections are handled. A clear policy helps reduce confusion, protect cash flow, and set expectations.
- A credit policy should spell out payment terms, including due dates, grace periods, fees, and interest rates.
- It should also define when you may refuse further credit, how credit limits are determined, and how limit increases are requested.
- Your policy should explain the collections process, including when accounts may be sent to a collection firm.
Frequently Asked Questions
What should a credit policy include?
A credit policy should include due dates and grace periods, fees and interest rates, criteria for refusing credit, information about credit limits, and the procedure for collections. The goal is to make the terms of the credit relationship clear so customers know what to expect and you can reduce payment confusion.
Why do businesses need a credit policy?
Businesses need a credit policy because extending credit without clear rules can lead to cash flow issues and unpaid invoices. A credit policy works like a contract between you and your customers by setting expectations for payment timing, penalties, credit access, and collections.
How should a credit policy handle due dates and grace periods?
Your credit policy should explain how due dates are calculated, whether grace periods are offered, and how long customers have before penalties begin. It should also tell customers where they can find their own due dates, such as on contracts or invoices.
What fees and interest rates belong in a credit policy?
List all fees and interest rates related to credit, and explain when interest begins to accrue. The policy should also tell customers how they can avoid fees, such as late payment assessments. It should follow any jurisdiction rules on maximum interest rates and fees.
How does a credit policy address collections?
A credit policy should state how unpaid debts are collected and when accounts may be referred to a third-party collection firm. It can also mention any administrative fees tied to collections. Clear language helps set expectations and may discourage defaulting on unpaid balances.
Getting crushed under unpaid invoices? Maybe you need a stronger credit policy.
If your business extends credit to customers, you need a rock-solid credit policy that lets your customers know exactly what you expect from them and what they should expect from you. Otherwise, you’re asking for cash flow issues.
Think of a credit policy as a contract between you and your customers. It established the guidelines for your credit relationship so that everyone understands the terms involved.
Due Dates and Grace Periods
If your customers don’t know when their payments are due, they might inadvertently miss them. Your credit policy should explain how you calculate due dates and explain whether you offer grace periods. If you decide to extend grace periods, detail the exact period of time that can elapse from the due date before the borrower begins to accrue penalties.
Since due dates can vary from one customer to the next, use your credit policy document to tell customers where they can find their own due dates, such as in a specific spot on their contracts or invoices. Don’t give your customers the chance to claim ignorance about a past-due payment.
Fees and Interest Rates
List all of the fees and interest rates related to credit for your business. Your jurisdiction might have specific regulations about maximum interest rates and fees, so make sure you follow those guidelines to the letter. Explain when interest begins to accrue, and let customers know how they can avoid fees, such as late payment assessments.
Criteria for Refusal
There’s a reason credit histories exist. Creditors want to know whether a potential customer represents a high risk due to previous late payments, delinquencies, judgments, and collections activity. You likely run credit checks on individuals and businesses before you offer credit, but you might have to change your decision down the line.
In your credit policy, list the circumstances in which you might refuse further purchases on credit. For instance, you might decide that a customer who misses two or more consecutive payments must pay cash on delivery for subsequent purchases. You can use your own cash flow data to decide where to draw the line.
Information About Credit Limits
You probably don’t offer the same credit line to every customer. A brand new company with a short track record and little credit history won’t get the same credit line as an established firm with an excellent credit history. The same goes for individuals.
Explain how you set credit limits and how customers can request credit limit increases. You might develop an internal procedure for setting credit limits and approving increases, but you don’t have to share that proprietary information. Just make sure your customers know that you take a discerning approach to extending credit.
Procedure for Collections
Finally, your credit policy should detail the process or procedure for collecting unpaid debts. Working with a third-party debt collection agency can prove extremely beneficial, especially when it comes to increasing collection rates and reducing stress in the office. Let customers know that you refer accounts to a collection firm after a certain amount of time has passed.
You can also mention administrative fees associated with putting an account into collections. If you’re firm and thorough in your language, your customers might think twice about defaulting on unpaid balances.
Every business needs a credit policy if they sell products or services on credit. If you’re struggling to collect unpaid debts, contact TSI. We’re confident we can help increase your recovery rate while treating your customers or clients with utmost respect.
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