How to Create a Credit Policy
Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia.
I feel for some of my clients who do not have proper credit management strategies in place. One of the best ways to avoid having bad debt is a credit policy. A credit policy dictates how much credit you’ll give 2 and who will receive it. Creating a robust credit policy is one way of making sure you get paid in full, on time.
Here’s my 6 easy steps to create your own credit policy:
1. Check out all customers before you extend credit to them
Do you know the exact name and type of business? Can you verify that they exist? Is the company or its owners liable for any debts? Can you obtain credit references? Establish your credit standard. This describes the profile for an acceptable credit customer, including appropriate details and examples. Then benchmark your new potential customer to your profile.
2. Set the credit amount
Your credit policy should determine the total amount of credit your firm will allow. Next, calculate how much of this amount you will allow your customers to borrow from you. Arrange customers in bands according to their risk such as low, medium, high. The lower the risk, the more credit can be allowed and vice versa. 20% of total debt owed to the supplier is a common maximum limit to the amount of credit to be given to high risk debtors.
You should also consider individual circumstances when agreeing credit limits. Review your customer credit limits regularly, based on the information you should be regularly gathering about them through monitoring. This should be performed frequently for new and fast-growing customers. Remember, you can still sell to high risk customers, but consider less risky payment options such as ‘cash on delivery’ or advance payment.
3. Set payment terms
You can only hold your customers to the terms that are agreed when an order is placed, so they need to be clearly communicated. You can do this by making sure that your standard terms and conditions of credit particularly 30 days from date of invoice are clearly stated in all pre-sale communications, including your website, quote, invoice or price list.
Submitting your terms and conditions with an invoice is usually too late in the event of a dispute. When writing your terms and conditions, state the penalty for late payment clearly, which should include your debt collection fees and/or legal fees incurred in the collection process. See free templates on writing your terms to include these penalties.
Adding a penalty for late payment is usually a very effective way of encouraging speedy payment.
4. Enforcing your credit policy
Make sure all staff, most importantly, the sales staff, are aware of your new credit policy. The goal of this process is to create a credit policy that is acceptable to everyone in your company, whilst also being fair and reasonable to existing and potential customers.
When it’s ready to go to print, make sure all t’s & c’s are clearly written, in plain English, on all documentation such as websites, quotes, service agreements, contracts and invoices, so that your potential new customer is in no doubt about your terms. If the credit amount is large, then a face to face meeting with your potential customer, outlining your new credit policy, will be beneficial, so there are no areas of doubt for your new customer.
5. Have a follow-up system for past due accounts
You will need a system and procedure for following up past due accounts. If you are going to handle this internally, use dedicated software, such as Xero, Debtor Daddy or Chaser. Set reminders to follow up overdue invoices immediately. Have a dedicated Accounts Receivables manager to oversee these accounts.
Your follow up system should include:
A. Generation of monthly statements/invoices so your clients know where they are at.
B. Reports that show the age of your receivables, over credit limit report, bad debt write-off reports.
C. Credit procedures to minimise bad debt losses.
D. Strictly enforced penalty payments and interest, plus a system for adding them and following them up.
6. Have a policy for outsourcing of accounts
This is where we come in, debt collection experts. If your account is past due, do not hesitate to outsource immediately to a debt collection expert. This policy will outline exactly when to outsource to a debt collection agent, how you would like your collection agency to conduct themselves and how you are going to monitor the performance of the debt collection agent. You should also have policies and procedures about when to litigate and who to outsource these matters to.
Once established, a credit policy will save you money and add to your bottom line. A written policy is more useful because it can be a source of stability and continuity in your company. A clearly stated credit policy is also a valuable aid in training credit and sales personnel.
Debt Recoveries Australia is the expert at recovering your outstanding debt without the drama. For more information, email at us email@example.com or call 1300 799 511. Talk to us about your debt collection concerns via Skype at debtrecoveries.