Implementing credit policy and procedures: illustration of woman on laptop and "credit policy" documents

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In my 13 years of credit management, I have seen many different types of operations in companies’ credit procedures, from the way employees are trained to the way the customers make payments.  

I reached out to credit professionals  in my network for even more insight: Thea Dudley, “Credit Overlord,” and Alaina Worden, Credit and Collections Manager have at least 25 years experience combined creating and implementing credit policies and procedures for construction businesses.

Read more: What is a credit policy?

Why companies don’t have policies & procedures  

When you walk into a company in a credit management type position, and you notice they don’t already have a policy in place, you wonder, why?  

Well, even if they don’t already know it, they probably do have policies and procedures. “Most companies do have credit policies [and procedures], they just haven’t written them down,” says Thea Dudley. “They are in the processes and practices you already follow.”

“Most companies do have credit policies [and procedures]. They just haven’t written them down.”

Thea Dudley

If you realize a company doesn’t have a policy in place, start by learning how they are currently doing things and writing them down. Listen for what has been working well and what hasn’t been working. When you believe you have enough information to create your policy, then go do it!

Why credit procedures matter

The “why” of any change in a company is always the first question of an employee and/or customer.  

“Having a credit policy in place helps many businesses with identifying what their standard course of business practice will be when it comes to approving credit accounts,” says Alaina Worden. 

“From what is required to establish credit terms, to who is authorized to offer terms, and to what credit limit/line should be established —  these are all questions that you should identify within your credit policy,” Alaina says.

Read more: 10 things to keep in mind when writing a credit policy

A credit policy sets the ground rules for how your company goes to market, how you treat customers, and how you approach debt,” Thea says. “It also sets expectations internally for your employees, as well as externally for your customers.”  

“The credit policy also reduces the amount of biased decision making and keeps everyone in the company accountable and on the same page in decision-making,” Thea also notes. “It can be used as a training module with your current or new employees, as well as setting expectations, and [as] a great reference tool for anyone. You can call it the ‘Rules of the Road.’”

The essentials: consistency & uniformity

Uniformity is always something that I would look for first when considering a new job at an organization. Knowing that there isn’t a clear understanding of what everyone is supposed to do doesn’t leave me with a good feeling.  

If you hear one employee wondering  “Why do I have to do things this way, when that person gets to do it that way?” you pretty much know —  they either don’t have their procedures written down, or they aren’t following them.

I’ve developed three different credit policies for previous employers, and I know no two companies are ever exactly the same. Having procedures written down not only provides uniformity between departments; it provides consistency between duties.  

“A credit policy also helps businesses stay in compliance with antitrust regulations, as well as ensuring they are within their bank covenants regulations,” Alaina adds.

Creating a policy & procedures that work

The first thing to do in creating the new policy is to detail out the procedures that will be referenced. 

Keep it simple! Simple is always better. Simple helps everyone understand and remember.

Credit and collections manager Alaina Worden offers these suggestions for outlining what might be included in your policy:

  • Meet with the Controller, CFO, and/or COO to understand the level of credit risk the company is willing to take. 
  • Find our whether your company is more conservative when it comes to risk or more aggressive to drive sales.
  • Outline what will be required to establish credit terms —  i.e. credit application, valid business license, etc.  
  • Determine whether a personal guarantee is going to be required for all customers, if the business is less than a certain age, or even at all.
  • Decide if you will sell to both B2B customers as well as consumers.
  • Outline the values, mission statement, and vision for the company — as well as the credit department.

“It is important to think of the entire process. However, if you are writing a policy for the first time at a business, you will want to review every six months and update the items missing, and modify a section that isn’t working as you thought  when you wrote the policy,” Alaina says. “After the first year, a credit policy should be reviewed every one to two years to determine if it is still working or if modification is needed.”

According to Alaina, “Remember the overall objective is to reduce risk while supporting sales. After all, if sales isn’t allowed to sell, credit won’t have to collect. You have to find the win/win with sales and credit. One team, one goal.”  

4 key sections of a credit policy

There are typically four key sections of your policy you need to ensure you have thought about. They should be included in your outline to ensure you are incorporating them into the policy.  

Consider these questions as you fill out your outline.  Remember: You want to consider the entire process.

1. New customer qualification requirements

What are your company’s terms, can they be altered? If so, is there an approval process?  

Are you going to require a credit application? Are you going to do credit checks (a credit report, trade or bank references, etc)? How long do you require a company to have been in business?

2. Cash applications

What form of payments will you accept? Are you going to accept credit cards? Will you require a driver’s license on all personal checks? Do you have a payment portal for receiving payments? Will you require that the customer always provides “how” they want the payment applied — or will you just apply it oldest to newest?

3.  Invoicing and statements

Will you send invoice/statements?  How will you design and create your invoices and statements? What means do you have of sending invoices and statements to customers, just mail? Can you email? Do you have an online platform they can log into and view the invoices themselves?  Will you do statements at all, or not? Will you send $0 balance statements?  

4.  Dealing with delinquent accounts

When should you make phone calls on delinquent customers, who is responsible to make the calls? 

What is your process for collecting payment from a customer that is past due? Will you send past due notices or payment demands? Will you be utilizing email, social media or just phone calls for reaching out to customers?  What happens if the balance is disputed? What is your process to correct and/or verify that issue? When will an account be “turned-off”?  How far over the credit limit can an order be approved? By who and for what percentage? 

Thea Dudley teaches credit & collections

Join the free certificate course to learn the foundations of credit & collections in construction with 30-year industry veteran Thea Dudley.

Getting buy-in on credit procedures

According to Alaina, “Writing a credit policy is hard enough, however if you do not gain the buy-in from those that will be required to enforce it or live by it, then you will be climbing an uphill battle.”

Sending out your outline to key players from the top down before creating the procedure. It’s at this stage that you’ll be able to see where people stand in what they currently do, and know what it will take to make the necessary changes.  

Let people know that the information may not have changed anything you have been doing —  it just puts it in writing so everyone has the same information, and there will be uniformity between departments.   

“I have found that allowing sales and credit personnel to have a voice in the policy allows the credit manager to see the policy in full view as it will affect the company as a whole”, Alaina said. “People get stuck in the ‘but this is how we have always done it,’ and changing [that] mindset can be difficult.”

“Change is hard, especially on sales, so be patient but persistent on the new rules,” Alaina continued.

How to turn policy into credit procedures

Now that everything is written down, and everyone has been able to give input and suggestions, it’s time to turn this new policy into a procedure!  

Here are some steps to ensure your new policy is implemented.

Steps:

  1. Set a date for when the new procedure will launch 
  2. Give a copy to all credit and sales personnel
  3. Publish the policy in all appropriate physical and online locations
  4. Solicit ongoing feedback of things that may not be working
  5. Remind everyone that the goal of the credit department is to control risk, not entirely eliminate it.

Provide a grace period so everyone gets used to the new policy, and remind folks that have deviated from the new policy. Once the grace period has lapsed, hold personnel responsible. Remind them that the policy has changed, and they need to be in compliance with the new procedures.

When you develop and enforce company policies and procedures, you improve your workplace. Employees know and understand what is expected of them, customers know and understand what is expected of getting and keeping a credit account, and the structural improvements will be noticed and appreciated.

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