What Should Your Credit Policy Include?

What Should Your Credit Policy Include?

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.

Protect from cash-flow issues related to unpaid debts.

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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July 27th, 2017|Collections|