Business Tips

How to Create a Credit Policy: Tips, Benefits, & More

Read Time: 9 min

graphic of a credit policy being written

Extending credit to customers is an excellent method for improving your business’s sales, but to do so you first need to create a credit policy. In fact, evidence suggests offering credit options to customers can increase incremental sales by more than 17%.[1]Microbilt. “How Businesses Can Grow Revenue Through Extending Low-Risk Credit“. Accessed September 1, 2022.

While this is an effective technique for making purchases more accessible to potential customers, offering credit also poses increased risks to your business. Lending too much money, especially to risky customers, can result in financial issues within your enterprise. However, a credit policy detailing your business’s credit standards mitigates the aforementioned problems. This guide takes a closer look at credit policies, how to create them, and why they are so crucial for you, your employees, and your customers. Let’s get started!

What Is a Credit Policy?

A credit policy is a document outlining an organization’s approach to extending money to customers. Credit policies typically include a set of principles for lending money, qualification requirements, and details regarding the collection of unpaid loans.

Credit policies vary depending on the business. Sophisticated policies provide clear, well-defined credit strategies that are easy for customers to understand. It’s important to thoroughly detail how your credit policy works in order to reduce the risk of negative financial impact.

Tips for Creating a Credit Policy

Before you create a new credit policy for your business, consider the following tips:

icon of a document representing writing down everything while creating a credit policy

Document everything

While documentation solidifies business operations, evidence suggests only 4% of companies document all of their internal processes.[2]Atlassian. “The importance of documentation (because it’s way more than a formality)“. Accessed September 1, 2022. One of the primary purposes of a credit policy is documentation. Undocumented credit policies typically lead to lending confusion, which can lead to revenue loss. Your comprehensive document should be easy for your staff to interpret.

icon of speech balloons representing clear communication while creating a credit policy

Communicate clearly

Clear communication is a vital component of a successful credit policy. Aim to use approachable language to communicate the pertinent details in your document—because what good does a credit policy that no one can understand?

icon of two people talking to represent clear guidelines being communicated while creating a credit policy

Provide clear guidelines

Successful credit policies provide clear credit guidelines. Ambiguity may not only leave your customers confused about your business’s policy, but it can also drain your business’s precious resources. For example, if you have a minimum credit score requirement, communicating this clearly can reduce your time spent sifting through credit applications from unqualified customers.

The Five Major Elements of a Credit Policy

Because your credit policy will serve as the cornerstone of your business’s credit lending operations, the prospect of creating this document can be intimidating. If you’re unsure of where to start, below is a list of the five major elements typically explained by credit policies.

1. Requests for receiving customer information

Your policy should state the specific information required of potential customers for credit approval. Below is applicable customer information you may consider requesting:

  • Name
  • Address
  • Annual income
  • Employer information
  • Consent to access their credit score
  • Declaration of any previous bad debt

2. Client qualifications

By outlining client qualifications, you’ll define and communicate credit criteria to your staff and customers. Qualifications can vary depending on the amount of credit issued. You may decide higher qualifications merit larger credit limits.

For instance, if you provide a $2,000 credit limit to a customer, you decide the qualification metrics are as follows:

  • $40,000+ in annual income
  • 650+ credit score
  • Employer reference
  • A default-free credit record

3. Credit terms and limits

Generally, before lending any money, you should state the credit terms and limits. Credit terms specify the length of the loan, the payment schedule, accepted payment methods, late payment penalties, and other similar information. Detail these terms in all of your business’s lending documents.

4. Invoicing terms

A clear outline of your invoicing terms ensures your staff and customers understand exactly when payments should be made. Instead of specifying a date, your invoicing terms may employ a time frame, such as a net-30 or net-60 payment schedule.

5. Debt collection policy

Unfortunately, not all your customers will repay their loans. You can protect your business by putting practices in place that prevent bad debt and safeguard your revenue. However, be sure to include your debt collection remedies in your credit policy.

The first step in your debt collection may be simply sending a letter reminding your customer of the payment. Next, your in-house credit team may place a call to the customer. If you haven’t received payment after several letters or calls, you may decide to sell the debt to a third-party collection service.

This is the part of the credit policy where a matrix is useful. You can create a table with timelines for the collection of different values of debt. It’s also useful to include information about disputes, deductions, payment plans, lawsuits, and other related debt collection elements.

Because aggressive debt collection processes can damage your business’s reputation, approach this element of the policy with lots of care.

How to Create a Credit Policy for Your Business

Now that you know what elements to include in your business’s credit policy, you can start creating this document. Below is a step-by-step guide on how to create a credit policy for your business.

sponsor investment graphic icon representing internal credit policy

Define your credit policy goals

In terms of your credit policy goals, aim to make them concrete and achievable. An example of a credit policy goal is to attain a specific number of sales solely using credit.

When defining your credit policy goals, start by observing other companies in your industry. Every industry has different risk appetites and revenue requirements. That said, looking to other similar businesses can help you define attainable, beneficial credit policy goals.

know your client graphic icon representing credit policy variables

Determine how credit will be evaluated

Many businesses create a matrix to set guidelines for evaluation processes regarding different types of credit. For example, you may decide your business only requires a general reference check or bank statement for less than $200 in financing. If a customer wants to borrow $1,000, their application may be subject to a basic credit check and employer references. If a customer wants to borrow more than $1,000, you may require a full credit check and identity verification process. Higher levels of credit should have strict customer evaluation standards before financing is granted.

office life graphic icon representing elements of a credit policy

Outline your company’s credit department roles

The roles of your credit department should be clearly outlined in your credit policy. Indicating your staff’s tasks and responsibilities ensures your staff members understand their specific roles in your business’s credit strategy. If components of your credit process are outsourced, include these details as well.

money falling into the palm of a hand graphic icon representing credit policies

Decide how collections will be handled

If you extend credit to your customers, you will likely experience delinquent payments. While it’s critical you have a collection strategy to protect your revenue, you don’t want this to damage customer relationships. To reduce the likelihood of damaged relationships, your credit policy should state exactly how long customers have to pay an invoice after receipt. A balance of business protection and client consideration is essential to handling collections successfully.

target bullseye graphic icon representing credit policy meaning

Describe your ideal credit applicant

When describing the type of applicant you want your credit policy to attract, specify preferable credit scores, incomes, and purchase totals. Your ideal credit applicant should be a trustworthy individual posing a low risk to your business.

However, you must create an ideal candidate that will generate a large enough applicant pool. Your ideal candidate can’t simply be someone with a perfect credit score and a seven-figure income. To meet your credit policy goals, you must create a large enough target market for your credit offerings.

calendar graphic icon representing objective of credit policy

Layout your procedures and timelines

Explicitly explain procedures and timelines concerning credit applications. State realistic turnaround times for each step of the application process. These benchmarks help your staff understand how quickly you expect them to begin evaluation upon the receipt of an application. It also ensures customers know what to expect when they apply for lending.

Some details to consider are the speed with which you plan on approving or rejecting applications and how soon after application approval you plan to extend credit.

The Top Three Benefits of Credit Policies

If creating a credit policy seems overly tedious, you may be wondering if it’s really necessary. The short answer is yes, it’s really necessary. As for the long answer, let’s take a look at the three leading benefits associated with creating a credit policy for your business:

1. Learn how much credit you can afford to extend

Creating a credit policy is one of the best ways to determine how much credit your business can afford to lend. You can figure this out by examining industry benchmarks, assessing risk, setting revenue goals, and calculating current cash flow. Your findings will help you interpret your lending capacity more clearly.

You must understand how much credit you can extend before doing so. Allowing customers to borrow large amounts of money results in debt exposure that can cause problems, especially in times of economic downturn.

3. Gain a complete picture of those applying for credit

By creating a credit policy, you’ll gain a better perspective of your customer base. Exploring your industry and its participants paints a clearer picture of who is inclined to apply for credit. With this information, you can optimize your credit operations and marketing strategies to align with your overall goals.

3. Extend credit on your terms to reduce risks

Undoubtedly, paying for goods and services with credit is very popular among United States consumers. For example, the buy now, pay later company Klarna has over seven million users in the United States alone.

That said, it’s still wise to reduce the risks of deferred payments when entering the credit market. Bad loans can quickly eat away at your business’s revenue, and dealing with the issues surrounding bad debt can be quite time-consuming. Creating a credit policy allows you to dictate the types of borrowers your business to whom your business will not extend credit.

graphic of a man giving tips on managing credit data when creating a credit policy

Four Tips for Managing Credit Data

If you plan on lending money to customers, you need to manage this data. However, organizing this type of data can be difficult without prior experience. Let’s take a look at some tips for managing credit data.

1. Utilize automation

While you can manually manage your credit data, automation simplifies this task. Fortunately, many software programs offer automated data collection, storage, and monitoring, allowing you to focus on other areas of your business operations.

2. Integrate credit data into your CRM

With customer relationship management (CRM) software, you can streamline the management of customer interactions. Most CRM software available in today’s market allows you to integrate credit management tools directly into the program.

3. Monitor credit data

Monitoring your credit data is incredibly important, especially if you have live contracts with customers. Many CRM software options offer credit management tools that can provide automatic updates alerting you of a new credit data event.

4. Update customer credit risk profiles regularly

If you operate a business frequented by repeat customers, strive to keep your customer credit profiles as current as possible. Setting specific dates on which to upgrade customer risk profiles can help you stay ahead of your exposure to fiscal risk. Using credit data to continuously assess your business’s risk is one of the best ways to avoid unwanted lending problems.

This is yet another process that can successfully utilize automation. While many businesses manually update customer credit risk profiles, doing so can be time-consuming if you have a large customer base. Many CRM software options now include automated tools for updating credit risk profiling.

Final Thoughts: Credit Policies

Now that you understand credit policies, how to create them, and why they are necessary for your business, it’s time to develop your own policy and start extending credit! Not only will your credit policy help you communicate credit requirements to your customers, but it will also ensure all your staff members understand your business’s approach to credit.

Remember, extending credit is a method for increasing your business’s revenue, not increasing its losses. By partnering with a merchant services provider, you can obtain the software integrations and CRM platform necessary to mitigate financial loss resulting from extending credit.

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Article Sources

  1. Microbilt. “How Businesses Can Grow Revenue Through Extending Low-Risk Credit“. Accessed September 1, 2022.
  2. Atlassian. “The importance of documentation (because it’s way more than a formality)“. Accessed September 1, 2022.

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