How to Create a Bulletproof Business Trade Credit Policy
Before your company dives into the process of offering credit terms to your customer, it’s important to establish a clear written credit policy that helps you achieve your business goals and also lays out your procedures and rules for implementing your policy.
What is a Trade Credit Policy?
A business trade credit policy is a set of guidelines that evaluate customer creditworthiness, sets credit and payment terms for customers, and then manages the collections and late-payment process. The National Association of Credit Management says a well-written credit policy establishes a framework for consistent credit decisions.
In simpler terms, it will make sure you get paid by your customers.
A proper business trade credit policy is an essential component of a company’s overall business strategy that maximizes profit and minimizes risk and delinquent payments.
Questions to Ask
First, it’s worth asking yourself a handful of questions so you set the stage for implementing clear goals that your credit policy will tackle and address.
What are your credit and business goals? It’s imperative that you set clear, quantifiable and measurable goals to limit risk and maximize cash flow. If you’re going to create a credit policy, what is its purpose?
How do you minimize risk? In addition to the above-mentioned goals, what policies can you put into place to reduce credit exposure? Reducing monetary loss should be a top objective.
How to evaluate creditworthiness? What policies and procedures can you put into place to better evaluate customer creditworthiness? The first step for your customers is always to get them to fill out a digital credit application. Knowing your customers is key.
Who has credit responsibilities? Having clearly defined roles and responsibilities maintains order and increases efficiency in your company, according to Dun & Bradstreet. It may be a good idea to require that only members of the credit department are authorized to communicate with applicants about the credit application process. Having sales get involved might complicate things.
What is your company’s strategy for establishing credit terms? According to NACM, companies should take into account the anticipated purchasing volume, payment history with other vendors, financial statements, the customer’s market and industry.
What is the collections process for late or delinquent payments? Can you implement policies that will deter late and delinquent payments, and can you expedite the collections process should it get to that stage?
What is your company's cash position? The better cash flow your company has, the better terms you can offer your customers.
Whether you’re already offering credit terms to your customers, or you’re considering it, the first step should always be to create a credit policy. Below are the steps you can take to quickly get started with a policy that will be sound and effective.
8 Steps to Create a Bulletproof Trade Credit Policy
Establish Implementation Procedures And Communicate to All Parties. Have a clear understanding of your company’s Standard Operating Procedures, or SOPs, as well as the credit authorization process. Your credit department’s policies and procedures should be communicated internally, as well as to potential and current customers.
Credit Policy Should Be Set According to Cash Flow Needs. Having stable and predictable cash flow is a hallmark of a well-run financial department. Set your policies and procedures -- as well as your terms and conditions of sale -- that all work to this goal. For example, in this step you’ll want to agree to your credit limit and terms.
Review, and Approve or Reject Application. The credit manager should review the completed credit application -- then approve, request more information, or reject the application. In doing so, the manager is setting the terms and credit limit for that customer, while still following the company’s overall policies on terms of sale.
Monitor Customer Payments and Enforce Your Terms. Your accounts receivable team should monitor payment timeliness, as well as discounts, deductions and unpaid fees. Bringing on third-party collections agencies may be necessary if terms aren’t followed.
Update and Reevaluate Your Credit Policy Regularly. You should update and reevaluate your company’s credit policy regularly. That could be every six months or more likely once per year.
Review Accounts. Businesses change, economic cycles swing up and down -- and customers come and go. You may consider extending credit terms for customers that have already established a timely payment history. Or you may reduce or end terms for those that aren’t paying on time. NACM recommends reviewing your customer accounts once a year. That means using a monitoring service like Nectarine Credit and having customers sign a new application when significant events take place.
Create Procedures and Rules. After you’ve written down and created your company’s credit policy, you should create procedures and rules to accomplish the policy goals, according to NACM.
If you can answer the questions above first, this will help you lay the groundwork for creating a sound credit policy. Then, if you can start following the 8 steps above you will have a majority of your work done.