If you’re looking to safeguard the financial health of a business and improve customer relationships, establishing well-defined credit procedures and credit policy is crucial. A credit policy acts as a blueprint for how your business extends credit to customers. You can reduce the risk of bad debt and streamline your entire credit process, all while improving customer relationships, by developing and implementing a best-practice credit policy.  

What is a credit policy? 

A credit policy outlines the rules and regulations your business has established to ensure that your customers pay you promptly. It is a document that guides how your business extends credit to its customers, and what to do when late payment and/or debt occurs.  

A credit policy should include all factors related to the management of credit-related activities in your business. This includes the terms and conditions outlined in your credit applications and the eligibility criteria used to evaluate customers.  

What should a credit policy contain? 

A successful credit policy should contain the following:  

• Credit applications: Including the information and documentation needed to support an application. 

• Credit eligibility and approval: The criteria the business uses to assess the creditworthiness of potential customers. How your business reviews its applications, including the internal departments involved and any internal calculations, or external intelligent tools, used in the assessment of new customer applications.  

• Payment terms: Details of your credit terms, including payment periods and payment methods. Outline the consequences of delinquency, such as any costs associated with late payment, as well as when debt escalation will occur.  

• Credit monitoring: How you monitor your customer’s payment behaviour. Utilising tools, such as CreditorWatch’s 24/7 Monitoring and Alerts, can come in handy in assisting in the tracking of customer activity.  

• Collections procedures: How your business manages collections. This includes defining a timeline for customer follow-ups, and potential actions to be taken for late or unpaid invoices. Note, if you have not streamlined your collections process yet, it may be worthwhile booking a free demo of CreditorWatch Collect for automated debt collection. 
   

When does a business need a credit policy? 

A business doesn’t need to be a major, ASX200 listed company to be deserving of a best-practice credit policy. The best time to create a business credit policy was yesterday, as it offers so many benefits to the risk mitigation and cash flow protection of a business – regardless of its size.   

Put simply, if a business extends credit to customers, it can be worthwhile developing a best-practice credit policy.  

The benefits of creating a credit policy 

There are a range of reasons why your business should create a credit policy, with risk mitigation being one of the most significant advantages. You may reduce the risk of extending credit to untrustworthy customers by creating a defined credit policy and procedure for assessing customer credit applications, as well as outlining clear payment and collection terms.  

Further, a credit policy creates clear rules and directions for employees involved in the assessment of credit applications, chasing of late payments, or collection procedures. This can streamline the entire credit process and make a business’ financial operations more efficient.  

Credit policies can also ensure a consistent approach to customer interactions, as it outlines clear instructions regarding how the business evaluates credit applications, determines its credit terms, and manages collections. It can be an invaluable tool in training credit and sales employees. 

For example, if a customer was 91 days in arrears, and your payment terms outlined a 90 day limit before escalation, the credit manager could move swiftly to collection procedures. The credit policy would then allow for consistency and transparency between both the business and customer, helping to maintain your customer relationships and protect business cash flow while chasing unpaid invoices.  

How often should a credit policy be updated? 

Once you have created and implemented your credit policy, don’t let it be carved in stone. In fact, you want to ensure that it is updated regularly, with an annual review as a standard rule of thumb.  

This allows you to adapt the credit policy to any new legal requirements, the latest market conditions, as well as adverse experiences with current policy. For example, your sales team may find greater success in invoice payment by shortening your existing payment terms. In this instance, you’d want to be able to roll-out these changes across your credit applications, and update the credit policy to reflect this for new customers.  

Should you use a lawyer to help with a credit policy? 

Seeking legal advice can be invaluable in the development of a credit policy. As Consumer Credit Law can be highly complex in Australia, engaging with a lawyer can help you to navigate the legal requirements involved in credit policies and procedures.   

You want to ensure that your credit policy meets all legal requirements, so as to avoid legal issues or any potential penalties against the business. This can be especially helpful in the development of credit application terms and conditions, particularly as they relate to the specific needs of your business and its customers.  

However, it’s not just a lawyer that you should consider working with in the development of your credit policy, but also a credit reporting and monitoring company like CreditorWatch. CreditorWatch can assist businesses from the top down in the development and improvement of key components of their credit policy. 

From digital onboarding solutions, such as SmartID and ApplyEasy, that improve data accuracy and improve customer experience, to business credit checks and credit reports at the click of a button, CreditorWatch is the best tool in your arsenal for credit risk management. 
 

Get in touch with our helpful team today to discover how easy it could be to create your best-practice credit policy.