Fillable Printable Credit Policy Sample
Fillable Printable Credit Policy Sample
Credit Policy Sample
Credit Policy: Minimizing
Delinquency and Bad Debts
Prepared and edited
by NACM Oregon
2015
7931 NE Halsey, #103, Portland, Oregon 97213
Phone 800.622.6985 or 503.257.0802 • www.nacmoregon.org
Page 1 of 6
Considerations for Your Credit Policy
Objectives
What are we trying to accomplish? The credit policy answers in general terms the question, "What will we
do to accomplish these objectives?"
Begin with a clear understanding of the Company in the development of a credit policy. This means an
understanding of corporate goals and objectives, both for larger operations, such as production and sales, and
for less tangible areas such as public relations. Any statement of policy can then be tested by this question:
"Will this help us achieve company and department goals and objectives?"
Policy is established to meet the objectives of the company, which are determined before any other
actions can be taken. The credit policy serves as a guide in determining how to handle given kinds of credit
and A/R issues, but it does not offer definitive solutions.
Credit policy presents a range of solutions within which the credit executive exercises judgment. In the process
of decision making, credit policy is constantly interpreted and applied to concrete situations with the help of
specific guides or procedures.
Policy and Practice
In practice, the range of possible decisions provided under a firm's credit policy narrows for particular
personnel,
situations, or time periods.
Changes in practice within a given policy provide flexibility in meeting changing conditions. A company's credit
policy should be applicable to the great majority of credit situations over a long period of time.
Exceptions do arise. These decisions are usually reserved for the head of the department. Like the credit policy
itself, such decisions must be consistent with overall company policy and objectives.
Financial Considerations
1.
The amount of capital commitment a company provides for its receivable investment – This
concerns the protection of the capital and the return that it will generate.
2.
The type of risks acceptable to the company or the basis on which the company will exchange its
products and services for the customer's credit.
Company and Coordinate Policies
1.
What will be the relation of the credit function to the financial management of the company? Will it act
primarily to protect the company funds invested in customers, or will it endeavor to increase the turnover
of these funds and consequently aid in the generation of profits?
2.
What will be the relation of credit to the marketing function of the company?
3.
Does the credit policy present a realistic, acceptable basis on which credit decisions can be made in an
atmosphere of mature consideration?
Legal Restraints
Credit terms are deemed by antitrust law to be an aspect of price. Terms of sale, cash discounts, and late
charges are considered to be aspects of price and, as such, they fall under the Robinson-Patman Act. The
company policy on these matters should specify that these programs "should be applied equally to all like
2
customers or to like groups of customers purchasing like products." When they are not applied equally to all
members of like
groups, this may be interpreted as a form of price discrimination. Also, there can be no
agreement between competitors with respect to price, discount terms, and other credit programs offered to
customers as such would be unlawful as a violation of the Sherman Act.
Industry Characteristics
In considering credit policy relative to conditions within the industry, the company's long-range ability to
compete must be evaluated. Other factors include its present position in the industry, financial strength,
and such factors as the strength of its marketing organization and its position in products development.
Most companies find it necessary to establish credit policies with one eye on the competition.
Market Position of the Company
The relative standing of a company will influence the course of action it sets to meet credit problems. If
its
position is undisputed, a company may demand more from its customers. A company that is just getting
started, on the other hand, may find it advantageous to be more lenient in its credit policy.
Type of Customer
Where the buyers’ line of business is characteristically short of capital, it is unrealistic for credit policy to be
unduly restrictive. If a company operates on that basis, it cannot maintain a place in the market.
On the other hand, if an industry has many well-established customers, the company that takes additional
risk must expect additional return for this added risk.
With enough good credit risks available to provide adequate profits, there must be an added incentive to
make sales to fair or marginal risks.
Types of Merchandise
This factor always affects the credit policy of the seller. If merchandise can be repossessed in good
condition, without substantial loss of value, there is a tendency to sell on a more liberal basis.
Geographical Considerations
Widely separated markets require particular modifications in credit analysis and in collection efforts.
Financial Strength of the Company
Underfinanced companies generally need every dollar they can muster to assure themselves sufficient
funds for operation. Therefore, such a company might prefer to establish a more restrictive credit policy.
However, the capital restriction is usually accomplished by a poor market position, and the company may
be unable to insist on prompt payments. With fewer accounts, it cannot afford to turn away business.
A very large company, on the other hand, can afford to divert a portion of its funds to carrying customer
receivables. Such a company may operate with a more liberal credit policy.
It often seems the company that can afford to carry overdue accounts may more easily afford to be selective
in
its choice of credit customers.
Economic Trends
When times are prosperous, the ability of debtors to pay timely their bills may be improved somewhat; however,
there is a potential danger a customer may tend to overbuy. During slow business periods, debtors tend to
delay payment of their bills, and credit requirements tend to be stricter.
5
As sales drop, companies are faced with maintaining volume during a period of decreasing sales and more
demanding selection of credit customers.
Consistency is important to avoid confusion on the part of customers. A sound credit policy requires enough
flexibility to be compatible with the wide fluctuations of the economy but at the same time provide sufficient
structure to avoid confusing customers and prospects.
Basic Contents of Credit Policy
A credit policy should address several matters:
1.
Credit information requirements.
2.
Risk evaluation process and setting a credit limit.
3.
Terms of sale.
4.
Deductions and resolution.
5.
Collections.
6.
Credit authority.
7.
Communication with sales.
Advantages of a Written Policy
All companies have a credit policy. A written one has the following advantages:
1.
Your customers know your credit policy. Writing it down reinforces its application in a variety of situations
and provides consistency in dealing with customers
2.
When we write it down, we usually are more thoughtful and deliberate.
3.
A written policy provides a source of stability and continuity to the operation, not only for the credit
department but the company as a whole.
4.
Consistent decisions provide greater profitability.
5.
A clearly stated credit policy provides a valuable training aid for credit and sales personnel.
Communication of Policy
The policy should be endorsed by top management. Management should issue the policy, and it should be made
known to affected departments in the company. In the case of Sales, representatives should know what
customer information will be required for new orders and for periodic reviews.
Customers
The placement of the first order provides the ideal opportunity to discuss with the new customer your
company's credit policy. This starts the relationship on solid footing, demonstrates that Sales and Credit
5
work closely together, and makes it much easier to refer to terms and policies should a future
misunderstanding arise.
Assigning Responsibility
Credit policy establishes the broad limits for decisions over a long period of time. To make these limits a
workable guide to decision-making, it is necessary to specify who has the authority to make specific types
of decisions.
Factors Influencing Short-term Policy Application
The short-term application of policy can be quite flexible. The firm may adjust procedures in order to meet
changing conditions.
A company's current financial position may influence the short-term application of policy.
For example,
severely limited operating capital may require emphasis on prompt collections and rapid turnover of
accounts receivable.
Business conditions affecting the areas or industries in which the company operates also are major factors
in policy application. (Note: business conditions
within a given industry
affect the interpretation of credit
policy. Not all segments of the economy change at the same rate or in the same direction.)
Changes in the general level of prosperity affect the credit department along with the whole company. The
same credit policy would be in effect during all phases of the cycle, but its application would be changed.
Review of the Credit Policy
The credit policy and its application should be reviewed at stated intervals. Timing depends on such factors
as the difficulty of reaching objectives and changes in the competitive situation. The policy and application
are evaluated in terms of their effectiveness in reaching company-designated objectives.
Types of Credit Policies
A credit policy has two distinct components: analysis of risk and degree of collection effort. In defining these
components of a credit policy, the company has to answer the following questions. How much risk is the
firm willing to take in granting credit to its customers? How much money and effort is the company willing
to spend in collecting amounts owed to it? How will it treat past-due accounts? Will unearned discounts
be permitted? Will the company charge late fees?
These questions can generate many different answers. As a result, a number of different credit and
collection policies can be set. Here are four examples:
1.
Strict analysis of risk and strict collections
Under this type of policy, only high credit-rated accounts are accepted, and very little variation from
terms is allowed. The analysis of risk is thorough. Collection efforts require a fairly large staff, and the
selling effort may be restricted. However, the increased staff costs may pay sizable dividends in the
form of improved accounts receivable turnover and minimal bad debt losses.
2.
Strict analysis of risk and liberal collections
Somewhat more liberal in its collection procedures, this type of policy concentrates on the selection of
good credit risks, but does not aggressively press for payment. If a supplier cost of capital is high, this
type of policy may lead to problems, especially if orders involve sizable dollars. In such a case, it may be
5
more prudent to follow collections closely.
3.
Liberal analysis of risk and vigorous collection effort
With this policy, the emphasis is on collections. Credit analysis is liberal, so nearly everyone who has
applied has been accepted. Close control is kept over collections. This type of policy would normally
be followed in selling high markup, low unit priced goods. The cost of credit analysis is low with this
type of credit policy, but collection costs are usually very high.
4.
Liberal analysis of risk and liberal collections
This policy aims to maximize sales volume; however, the costs of bad debts and of carrying receivables
for long periods of time offset the profits. Profit margins must be set so high that the bad debt losses
are balanced effectively.
Credit Policies—Some Examples
This policy was written for a small company with a one-person credit department and very specific
needs. Note
the minimum order level for credit checking and special terms of sale for onetime or bulk orders.
SAMPLE CR E D I T P O L I CY #1
1.
New customers placing orders with a value exceeding $300 will have a credit check performed and
credit approval prior to shipment.
2.
All customer accounts will have a
set credit limit. Purchases which exceed the established credit
limit or which will result in the account balance exceeding the limit will have approval of the credit
manager before shipment.
3.
Terms of sale:
a.
The standard terms of sale are Net 10 EOM. The company will issue a statement on the first day
of each month, which summarizes the purchases during the previous month. The balance is due and
payable on the 10th of the month. For example, purchases during June are summarized on a
statement as of June 30 and are due on July 10.
b.
Special terms of sale for setups and other onetime bulk sales of more than $3,000 are 1/3 10 EOM,
1/3 10 EOSM, and 1/3 10 EOTM, i.e., one-third due on the tenth of the first month, one-third due on
the tenth of the second month, and one-third due on the tenth of the third month. Special terms will
be pre -approved by the credit manager.
4.
Accounts sixty (60) days or more past due will be placed on credit hold. Additional shipments will have
the approval of the credit manager or will be shipped only on a CWO or COD basis.
5.
The credit manager has the responsibility for all credit and collection functions. The credit manager will
keep the sales department informed of all actions involving customers.
6
SAMPLE CREDIT POLICY # 2
The credit department shall function under the supervision of the Director of Credit, who shall report
Chief Financial Officer of the Company.
Credit Department activities shall be coordinated with overall corporation policy and the activities of
the sales department.
It shall be the responsibility of the credit department to help build a broad and durable customer
relationship for the Company. In the performance of this duty, the credit department shall
maintain a positive and constructive attitude toward (the) corporation's customers; discrimination
in customer relationships is to be avoided. Likewise, the credit and sales departments shall
maintain a cooperative attitude, with an aim toward promoting sales. Within the bounds of sound
credit
practices, the credit department shall endeavor to find a suitable credit basis on which to
deal with every customer that the sales department desires to have purchase our products. The
decision as to what constitutes a suitable credit basis shall rest with the credit department. From
the standpoint of credit, no customer shall be denied the right to purchase our products until
every means of selling to that customer on a safe and sound basis has been exhausted.
Standards by which credit risks are accepted or rejected shall be flexible enough to permit the
maximum of profitable sales by the corporation. Marginal credit risks are to be dealt with when they
are needed to complete operating schedules and as long as they constitute a source of added net profit
to the Company.
Customer contacts are to be kept on a dignified and friendly basis, conducted so as to promote a
wholesome respect for the Company and its business practices.
Credit Department practices shall be designed to permit the maximum number of orders to flow
without interruption through the sales department, but to provide for interception when necessary as
a means of safeguarding credit extensions.
The credit department shall keep the sales department fully informed regarding the status of a
customer's account when the free flow of orders from that customer is in jeopardy.
The credit department has the responsibility for collection of all accounts. Sales department advice or
direct help may be sought in exceptional cases. All credit decisions shall be made independently and
shall strive to maximize return on investment in receivables while achieving the lowest possible
days sales outstanding and bad debt loss.
From Credit Executives Handbook, Christie & Bracuti.
