What is a Credit Policy?
At the most basic and fundamental level, a Credit Policy is a set of guidelines that:
- Are used to determine which customers are extended credit;
- Set payment terms for those parties;
- Define limits to be set on outstanding credit accounts; and
- Outline the steps and procedures used to deal with delinquent accounts.
Not all credit policies are created equal, however. A quality credit policy should maximize revenue by allowing the extension of credit while minimizing the risk of bad debt. In order to best accomplish these goals, credit policies should meet other minimum requirements, such as being written, being consistently applied, and specifying the use of security instruments to secure the debt whenever possible.
While some of these subsections can be broken down further, the general sub-parts of a credit policy include:
- Mission Statement / Credit Goals
- Organization Tiers (Decision Limits)
- Credit Evaluation of New Customers
- Security and Risk Mitigation
- Recovery / Collections / Litigation