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How to Implement Credit Policies & Procedures to Reduce Bad Debt

There are so many different ways you can set up credit policies at your business, but only a select few are truly beneficial in reducing financial risk – especially in the construction industry where cash flow is often unstable. 

If you’re hoping to improve your credit policies and procedures, or wanting to learn how to set up these policies in the first place, then you won’t want to miss out on this upcoming webinar led by Alaina M Worden, CCE, the Credit and Collections Manager at Carson Team!  

In this discussion and Q&A find out:

  • How to create and implement effective credit policies
  • Important procedures to include in your policies  
  • Ways to ensure your business is compliant with antitrust and bank regulations


Lori J. Drake CBA (00:00):

Good afternoon everybody. And thank you for joining us today. As we talk about implementing credit policies and procedures that reduce bad debt. My name is Lori Drake. I’m the payment professionals, community manager here at Levelset. And with us today, we have Elena warden with the Carson team. Elena, would you want to introduce yourself for a minute?

Alaina Worden (00:18):
Good morning or afternoon, depending on I guess, where you are in the United States? Um, yes. My name is Elena. I am a credit and collection manager. I’ve been in the industry for about 23 years, construction, trucking and fields. So I have some diversity. Um, my background is really looking to enhance, um, different policies and procedures within the credit department in implementing those types of changes. Um, I also spend a lot of time, um, mentoring other professionals and, um, sit on the CFTD Portland chapter, uh, as vice-president, and also sit on the NACM, um, commercial services board as well. So I stay very active, very active and busy.

Lori J. Drake CBA (01:10):
We go onto the next slide. And thank you again for being with us today. I know you guys have been crazy busy this month, I think, but he doesn’t know what Levelset is. We know that the construction industry is very complicated. So we tried to simplify things for you by, for having this like payment professionals, community, where you can network and share ideas. We have webinars classes, software, obviously. So you can do your notices and waivers, and we’ve been launching several new pages, the contractor profiles, subcontractor profiles, which are kind of like trade references. So if you haven’t checked those out yet, I would definitely suggest it goes next slide, please. I am Elena. This starts you. If you want to go ahead and take it off for us, uh, just really quick for everybody else, I’m going to put questions in the chat box, if you wouldn’t mind engaging and answering. And if you have any questions throughout the presentation, just go ahead and put them in there and we’ll get to you at the end. Go ahead. Oh, sorry about that.

Alaina Worden (02:04):
Okay. Thanks. Well, hello again, everybody. So I just wanted to, um, make sure that we all are kind of on the same page. And so I like to start out with this slide on really kind of the difference between credit policy and a credit procedure. So your credit policy is going to be your set of guidelines that are used to determine which customers are extended credit, which accounts do you bill, which ones are Cod setting up those payment terms and defining credit lines or limits, depending on how your organization is structured, um, your credit procedure’s going to be an established or an official way of doing something. So we’ll just jump right in here. Um, so really with this presentation, we’re coming from the perspective that you’ve already kind of taken the time to write out your credit policy. You should have a really kind of four defined areas within your credit policy, your new customer qualification requirements, your cash application, processes, your invoicing and statement, process, and how you’re going to deal with delinquent accounts.

Alaina Worden (03:07):
So those should really kind of be the bulk of your credit policy. You’re feeling comfortable and confident about what you’ve documented. You’ve met with your executive team, the senior leadership, everybody has their buy-in. And so now you’re really at a point like, okay, we’re ready to launch this. How do we do this? So really kind of, these are the steps that you’re going to take before you implement, um, your policy or your kind of go by with your policy. You’re going to set that, go live date and stick to it. I would suggest that if you think that you’re going to be ready to go live in, you know, 60 days, push it out to 90 days, um, and really kind of give yourself a buffer. You want to be able to stick to whatever date you say that you’re going to launch something. It just gives it a little bit more meat and a little bit more substance that you’re executing within the timeframe that you say that you’re going to do something.

Alaina Worden (04:00):
Um, you want to also make sure that you provide copies of all the necessary, uh, um, personnel. So your credit team, your sales team, that they have that document. You want to publish the policy in any appropriate, physical and online locations. Again, that’s going to be determined on how your company is structured and kind of the size of your company and how you get information out to your staff. You also want to make sure that you’re requesting feedback from credit and sales. Uh, credit policy is really, um, multi department functional. And so, uh, the greatest impact is with your sales team. And so you want to make sure that you’re giving them an opportunity to be able to share any concerns that they have. It’s also important to remind everyone that the goal of a credit department is really to reduce risk and not eliminated.

Alaina Worden (04:53):
A lot of times when you’re going to launch a new policy or you’re establishing some defined procedures, you get a lot of pushback from the sales staff saying, you know, you’re tying my arms. We’re not going to be able to, you know, sell to the customers. How are we supposed to meet our goals? And all of that information that kind of comes up with the sales and credit team and kind of that friction that’s a little bit there. And so if you’re communicating this throughout the process, there seems to be a little bit more buy-in from them. And they get on board that they seem to see it as more of a cohesive, uh, relationship. Hey, we’re doing this together rather than, Hey, this is credit coming down and saying, this is what we’re going to do.

Alaina Worden (05:37):
Um, again, it’s just adding that go live date. Um, it’s important, uh, for when that comes, becomes effective, that it’s documented. Again, I can’t stress it enough to make sure that you, your, your go live date is really a date that you can execute. Um, you want to allow the opportunity people to read and reread the policy. They need to be able to digest it. They need to be able to chew on it. You know, you may want to have a period of kind of a soft launch of when it’s going to go into effect so that you have people that are able to kind of test the waters and see, wait, is there anything that needs to change on this? Or you just getting pushed back from people because they don’t want the policy in place because it’s tying their hands or something like that.

Alaina Worden (06:25):
And so you need to be able to navigate those waters to see what’s working and what’s not. And making sure that everybody is becoming comfortable with those changes and that they have that time to, um, ask questions and that sort of thing you want to maybe even set up a couple of different meetings between, uh, maybe your high-end salespeople. So maybe your sales manager and your credit team, and just kind of talk through some of those scenarios first on what it’s going to look like, what the impact is going to be to them. And then, you know, depending on the structure of your company, it also would be a good opportunity to really, if you could get in front of all of the salespeople to say, Hey, this is the new credit policy. This is what it is. Pass out copies to everybody, be able to, um, have that conversation with them and, and solicit that feedback while you are face-to-face with them. And you can do that in a group setting as well.

Alaina Worden (07:27):
So again, providing copies to everybody who is, um, either needing to enforce it or has to live by it, um, allow that period of time for feedback prior to the go live and solicit feedback. If you’re not getting anybody to respond to you and you just send it out and, and you have crickets, then when they’re either not reading it or two, you know, they’re just like, oh, it’s another thing that I have to live by. Another thing that credit is, you know, putting on me to have to do, and how am I supposed to sell if this is happening and just kind of all that standard stuff that happens between credit and sales. So, um, you know, make sure that you’re soliciting that feedback. Lori, do you have a question? I do.

Lori J. Drake CBA (08:14):
Well, I have question for somebody else. Um, I’d wanted to catch you before you went on, Tom has asked, what do you do when they won’t reply to it or respond to the feedback that you’re requesting, but that it’s a department that you really need their buy-in.

Alaina Worden (08:29):
You know, I, I would say that if you can’t, I mean, is this coming from maybe like, uh, the, that department head, if it’s coming from the department head, then I would say, go above them. Right? Really, as you’re implementing your process, you really should have all your C-suite executives kind of all involved in the process. Right? You have their buy-in. And so you really kind of have the power of them behind you to roll this out. So if you’re not getting responses from the departments that need to be part of this process, then I would say, you know, go above set a meeting to include their boss along with them and you, and then just try to work it out that way. And maybe a meeting would be the way to go with that individual or that group of thank you.

Alaina Worden (09:21):
So, um, think that I pretty much ran through you. Yes. So now you’re at a point where you’re ready to kind of publish the policy. So it’s vital that the policy lives within your documented process. So whatever that process is, if you have a shared, you know, online, um, spot where you keep all of your procedures and policies, that should be there. If you have a dashboard or something like that, it should live there. If you’re old school and your company uses just paper, you know, have it printed in, in, in a place where, you know, people are able to get to it easily so that they can refer back to it when different situations come up, you want to make sure that you’re providing that location wherever it is, um, that everybody knows where to go and access it. Um, and then I would suggest if you have a marketing team check with them and see if it’s something that can be put in an internal newsletter, or maybe a mass emailing that goes out to all the staff, maybe you don’t have to put the entire policy in there, but, you know, just that some implemented you’ve implemented some changes.

Alaina Worden (10:33):
And so that people can be aware of it. You know, the policy affects more than just credit and sales. And I know that I kind of hash out this, you know, it’s credit and sales and credit and sales, but really it goes beyond that you have drivers in your warehouse and your we’ll call people. And however, the structure of your business is that other people have to live by it. Right? If you have drivers that are supposed to collect on CFD accounts, they need to know what is the Cod policy, do they not drop the product? Do they not deliver? You know, uh, if the, if the customer isn’t there to give them a check or credit card, or however that process works, the same thing with your will-call staff, what does that look like for them? Um, if you’re dealing with Cod, if you sell Cod account, or if accounts are placed on hold, if you’re putting an account on hold, because they’re over their credit line, or there’s some sort of risk factor in place, how are you sharing that information?

Alaina Worden (11:30):
That’s all something that should be documented in your credit policy and then shared with those departments once you get to the finalization, right? All of those other departments don’t need to be involved when you’re putting the process together, really it’s credit and sales are the most that needs to be involved when you’re putting together the credit policy. And I would say you to make sure that you’re just working with the sales manager or director of sales, your VP of sales, whoever that is within your company’s structure. And then you have your C-suites that are behind you on, um, that, that buy-in because that’s going to give you the push and the launch that you’re going to need to be able to get to that very objective between the credit for the credit department is to reduce risk while ensuring sales and giving them the flexibility to be able to sell to some of those higher risk accounts.

Alaina Worden (12:29):
The risk level is really dependent upon your company’s overall tolerance for risk. And that may fluctuate. So I would suggest in your policy, you have some sort of metric in there that will test time, right? You just, you don’t want it to be so absolute that you don’t have flexibility in your having to go in and redraft your credit policy. So whatever that risk level is, and, you know, maybe, I mean, I really can’t even give you a scenario because it’s so different for every single company, but know what the company’s risk is, and then leave a margin for you to be able to increase that risk, um, within your policy. So that there’s flexibility there. If you know, your, your company’s trying to gain market shares or something like that, you’re probably gonna take more risk in that year versus a year that you’re just trying to, to get through the year and, and make those sales.

Alaina Worden (13:24):
Um, so again, remembering that credit and sales were hand in hand, you can’t have one without the other, you just can’t, it’s not possible. Um, so you have to figure out how to work together and having it defined within a credit policy is really going to help, um, strengthen those relationships because everybody feels like it’s a partnership and there’s, buy-in on both sides. There’s give and take on both sides, a little bit of some bad debt, um, prevention. So, you know, really the prevention is measuring, you know, or reducing your bad debt. Um, really don’t want to overextend your customers. So what are some processes that you can put in place in your policy that will help you to be able to kind of mitigate some of that risk? Um, you want a strong collection process. How often are you going to call or email or correspond with your delinquent customers when to call?

Alaina Worden (14:23):
Are you calling them at five days, past due 10 days, past due 30 days past due? What does that look like for your company? Um, when are you going to use a third party? So is it, you know, after five attempts, is it after sending a letter series, do you just send past due reminders? Are you sending demand letters? Are you sending bond claims? Are you sending lien notices? What does that look like? Right. Not every organization has extra, um, tools to be able to against meaning they can’t file a lien or they can’t file against a bond, or they don’t have access to file a UCC, one filing. And so, you know, those companies have higher risk because they’re dealing with customers that they don’t have really kind of some, some additional resources to tap into. It’s really, if they have a personal guarantee, right.

Alaina Worden (15:13):
That seems to be the back leverage or, you know, maybe they have, um, you know, insurance on their AR. Right. You just, it really just depends, but you need to structure out your credit policy to really kind of, um, put in those tolerance for your bad debt, um, prevention. Um, what is your process for over credit line who’s authorized and at what level? So, you know, is your credit team authorized to override 120% of the stated credit line? Or is it more, is it less if it’s more, who, who do they need to go to? Is it then the credit manager? Does it need to go up the chain? What does that look like? And just having that information in your credit policy is going to help everybody live within the policy, and it’s going to help reduce, um, your bad debt. You also want to make sure that you’re watching your account maintenance and it’s so hard as credit professionals.

Alaina Worden (16:11):
I get it every single day. I, I get it, but it’s so important that we take time to review our active accounts. What does that look like for your company? Is it, you know, $10,000 is a risk that you can take for three years without looking at any of their information, you know, is 20,000. You need to look at every year, is it 150,000? You look at every years or a million you look at every year, right? You pack to just decide what is the risk tolerance for your company. And then from there build your, your schedule and how often you’re going to review these accounts. Um, and then what is your review include? Are you requesting updated credit reports? Are you requesting an updated credit application? Do you send out trade references? You know, is it a full review? Is it a soft review?

Alaina Worden (17:01):
Um, do you confirm that they’re still active with the secretary of state, if that’s even something that your company checks, you know, do you confirm that their business license is valid or that they’re, you know, construction bond is valid or whatever those measures are within your organization on what it looks like for your company? What does that review process look like? It’s just something that you want to take into consideration and make sure that you have it documented within your policy, and then there’s your confidentiality requirements. So how secure is your red flag rule data? When information is, is disclosed and what’s prohibited, that’s another piece that you want to include in it. So we’re just going to talk a little bit about the red flag regulation requirements. It’s something that I feel has kind of just slipped under the radar for a few too many years.

Alaina Worden (17:54):
And, and I would venture to bet that most companies don’t have like a defined process in place. And so I feel like from a credit perspective, it’s a great opportunity for you to just include this in with your credit policy. It’s not going to change over time if the policy is the policy, I mean, rules and regulations are in place for, for what they are so way back in December of 2010. Um, you know, fact, uh, uh, really put through a clarification act to define what the red flag rule really meant. And basically in a nutshell, if you pull any type of consumer credit report, so even if you’re pulling it on your personal guarantee force, you are subject to red flag regulations requirements. So, um, that’s kinda the gist of it. I won’t go in and read it. I did pull this information, um, from the red flag rule compliance, B2B companies aren’t necessarily exempt. It was an article that was published by fact, that it’s on their website. At least it was, it was published in 2013. So this, all this information came from, it’s a great article about a five or six page article, you know, maybe 15, 20 minute read, but well worth it.

Alaina Worden (19:18):
Um, and so just really kind of what, what is red flag compliant? So under fact you need to, um, each entity is encouraged to develop and implement its own Britain, identity theft prevention, and that’s what it comes down to. It really it within your credit policy, if you have what prevention measures you have in place and what will you do if your company, um, if there’s a breach is really kind of what it comes down to. So, you know, prevention is we do not store any social security numbers and or bank account information within our own, um, EPR system. It’s all stored on a secured, you know, third-party encrypted spot or all of our credit files, um, credit, uh, social security numbers, et cetera, all live in a locked file cabinets. If there’s a breach, what is your company going to do? Are you going to notify all, all customers?

Alaina Worden (20:19):
How do you notify all your customers? What process do you have in place to notify your customers? Do you only notify those that are within that breach? And so basically that is really what it comes down to. There are some very complex red flag rule policies that people have developed, and there are three paragraphs policies that people have developed and really you’re fine either way. It comes down to what your company’s, um, desire is on that. And really nobody’s coming to check to see if you have this policy in place, um, less, um, less, there is a complaint. If a complaint is made upon your company, then they will come in and they’ll ask for a copy of the policy that you have in place. And there is some pretty substantial fines for not having to in, in place. So, um, I encourage you, if you don’t have this within your credit policy to add the section to your policy, that is the end of what I have. So I’m anxious for some questions.

Lori J. Drake CBA (21:28):
Well, thank you again for taking your time and teach and all that. I definitely learned some stuff that I hadn’t known before, so I’m sure other people have as well. I do have some questions. Uh Khamis I think that’s how you pronounce. It says how long does the process typically take from start to finish

Alaina Worden (21:45):
In writing a credit policy? I’m assuming implementing, I would say, I mean, if you’re starting from, okay, we’re, we’re, we’re writing it and then we’re going to implement, I would say you, depending on how much time you’re able to spin into it, I think they can take anywhere from three to nine months, um, probably to get that whole process done. It depends on the complexity of your company and how many people you need to get, how many layers of people you need to get bought in to the policy before you can go through with it. And I would say if you’re just starting out and you’re already writing a credit policy for the first time, um, just know that you’re going to continue to enhance it. And over time, it’s going to get bigger and better, and it’s going to become what I like to say.

Alaina Worden (22:33):
Our kind of motto within the credit department is bigger, better, faster, stronger, and more efficient. And so I kind of carry that piece through everything we do within the credit department. And your policy will become bigger, better, faster, stronger, and more efficient. It’s just going to naturally happen. But, um, it, it is a process. It does take time to, to get it to launch and to get the buy-in and get all the meetings and all of that, um, to, to happen, to get it to go. So I would say plan on spinning, you know, at minimum three to six months on, it could take longer if you’re in a bigger organization.

Lori J. Drake CBA (23:06):
Thank you. But for all that detail, and I love that motto. That’s cool. Um, I do have a question here from Emily. We generally want to collect Cod payments up front. Once we complete work, when should we warn the client? We will be collecting payment upfront in the original quote, or do we just deliver the invoice with a due date on it?

Alaina Worden (23:26):
Well, if it’s a Cod customer, they need to know upfront. So I would say at the time that they’re placing the order. So whoever is doing your order injury, if you have sales that are putting that through, or if you have, you know, a department that is doing those boarders, whoever’s responsible and is, um, customer facing that to wants to have that conversation. So if your salespeople are the ones that are kind of running the show, you want your salespeople to have that conversation. It looks like your account setup is cog. We just, so you know, upon delivery, we’ll need to collect this. If you don’t have your drivers collecting, if your policy has sent to have your drivers collect, then you need to collect before the product goes out the door. So you just need to define what that looks like.

Lori J. Drake CBA (24:11):
Thank you. All right. Question from Sarah, you’ve been a part of a lot. Have any of your jobs or have all your jobs actually had this policy already in place? None of them have

Speaker 3 (24:26):
Come on.

Alaina Worden (24:27):
I know I, um, so my 25 years ago when I first started in credit, no, absolutely. There was no policy policy in place, and I obviously didn’t have all of this knowledge and background. And so that first policy that was put together was pretty much, you know, a sham of, oh, I think we should probably do this. This probably makes sense. And you know, were just starting out. So worked. I defined it as I, as I went along in some of the companies that I worked for have had some sort of policy in place, or maybe it was not written documented policy, but it was like, Hey, this is how we do things around here type of thing. And so then it was taking, okay, this is how things were done. Let’s get it on paper. Let’s does this make sense that we do it this way?

Alaina Worden (25:14):
Are we protecting assets? Are we still allowing sales to, you know, grow the business, that sort of thing. And then kind of going from there, um, or, um, you know, one company that I went into how to produce solid, uh, credit policy in place, but they didn’t have procedures in place. They were, there was no documented procedures on how anything was done. And so I spent quite a bit of time, um, on putting together, uh, you know, procedures, guides, and actually one of my webinars, um, on building efficiencies within credit really kind of talks about what that process looks like.

Lori J. Drake CBA (25:50):
So I’ll just add a follow-up to that when you’ve gone into your company that didn’t have a credit credit policy, what was your process to convince them that they needed to have one before you went through everything else?

Alaina Worden (26:01):
Well, usually looking at the bad debt year over year is a huge piece, uh, to say, Hey, we can really reduce this debt by whatever percentage, probably by half, if there was no policy in place, if we implement some processes. And usually, so it depends on if you’re reporting to the CFO or the controller, most companies that’s at least where I’ve worked. That’s kind of been the direction that I’ve reported one way or the other. They’re usually pretty eager to get some sort of change to happen. That’s usually why they’re bringing in qualified credit managers to implement some sort of change. And so I would say if you’re new going into a company and there’s nothing, you’re, you’re being able to launch it a little bit faster, would probably be easier than going into then being at a company for three or four years, and then going and saying, Hey, I know that we haven’t had this in place, but here’s the reasons why I think we shouldn’t really just kind of list out those highlights and start with your immediate manager and then work your way up. And you’ll generally get the buy-in, especially in today’s economy. I think that the buy-in is definitely more there than it was 25 years or so ago.

Lori J. Drake CBA (27:19):
No, I like that answer. Um, let’s see, we got another one from Cammie. She says, what is a good industry? DSO I’m in nature credits.

Speaker 4 (27:29):
Okay. I

Alaina Worden (27:31):
Mean, it really, that’s pretty loaded question. It really depends. And I, and I hate that. I feel like I’m a broken record saying this, but it really depends on your company’s, um, risk and what their tolerance is for risk. Because if you are out there trying, if your company is out there trying to gain market share, then you are selling to more subpar customers. Then if you are just trying to sustain and enhance the experience of your customers and just grow those customers, um, so really to define what the DSO should be. It really comes down to, you know, the risk within the, the, um, company, what they’re willing to take, what your terms are and how fast they kind of want that wheel to turn. Right? And so if you’re really cash hungry, and you’re really needing that cash flow in, then your DSO needs to be turning pretty quickly and you need to be as close to terms with your customers.

Alaina Worden (28:32):
And if that’s the case, then I would suggest that you start making soft collection calls on maybe those larger customers two or three days before the payment’s due. Just making sure they have copies of the invoice. There’s no issue with, you know, the pricing on it, all of those pieces. So that way, when it comes to you’re able to get them, and if you’re really needing to tighten your DSO, then I would start ingesting. If your company allows you to do, you know, like auto EFT. So you’re just going in and pulling that, you know, payment from the customer’s bank account, you know, on the due date, that sort of thing that really helps to, uh, tighten up your DSL. If you’re needing to do that.

Lori J. Drake CBA (29:12):
I remember how many years ago, but I remember we were at a meeting and it was all the credit managers for the company, and everybody was talking about their DSO and bad debt and all that. And finally, the boss called out to one of them and said, do you know why your DSO is so low? Because there was one territory that just was really low and you know, everybody else looked really bad. He said that you are not taking any risks on any of your customers. Therefore you’re not getting any sales either. You need to knock it off.

Speaker 3 (29:38):
So I know that that makes a difference. There really

Alaina Worden (29:41):
Has to be a balance of, you know, risks and, you know, structure, right? Because if you have zero bad debt, yes, it’s great to say, oh my gosh, we didn’t have any bad debt, but that means we probably didn’t take enough risks either. There should be some bad debt that happens because you know, you do need to assume that risk, especially if you’re trying to grow your company, which most companies are trying to grow very few are like, Hmm, we just need to sit, you know, in this spot for whatever.

Speaker 3 (30:13):
So correct.

Lori J. Drake CBA (30:16):
I got an email from Tanya or excuse me, a question. Where did you ever hear about a red flag thing?

Alaina Worden (30:24):
Oh my goodness. I am trying to think where I think that it actually kind of came out of the, um, crash in 2008. I actually think that that’s where it started bubbling and there was seminars cause they were seminars back then, um, and different, you know, topics of discussion, really, um, publications. That’s where, the stuff that started talking about red flag

Lori J. Drake CBA (30:57):
And just my 2 cents. That’s a great thing that industry groups are for if you ever get involved in those, because they always talk about legislation and new things coming out, but you have to do. And so it’s a great team. Yeah. Well that is all the questions that I, or that we have. Uh, Elena, thank you very much for again, taking your time with us. Like she mentioned before there isn’t efficiencies in credit, but she did. I think it was about two or three weeks ago. And if you go to Levelset dot webinars, it’ll show up there and you can watch that video as well. Uh, just remind everybody at the end of this presentation, I will be sending you an email with a quiz on it. Uh, it’s just a three question quiz. And if you take the quiz and get your certificate and posted on social, you’ll be entered into a raffle for a coffee card again, in the chat. I went ahead and put the link to a Theo Dudley’s book. Uh, she is, if you hadn’t taken her class, you definitely have to take her class. It’s all on credit management. She’s known as the overlord, she’s been through a lot of different things and she just kind of goes over the basics of all credit. Uh, that looks like all we have. I want to thank everybody again for joining us and hopefully we’ll see you next time.

Alaina Worden (32:07):
Thanks. Bye everyone. Thank you. Make sure everybody’s welcome.