What is a credit policy?

It is the “rules of engagement” relating to the granting and maintenance of credit within a particular company. A policy is a general course of action developed for recurring situations, designed to achieve established objectives.

Many companies have informal and at times varying and inconsistent credit policies because these policies are not formalised in a written document or if they are, that document is sitting in the credit manager’s filing cabinet never to see the light of day. It is strongly recommended that the credit policy of the company be formalised in a written document that is easily understandable and practical and is not overly restrictive and but at the same time sets out the company’s position in terms of various issues such as credit granting policies, increasing of credit, maintaining of payments and hand-over time periods and procedures.

The first step in the process is to look at the company’s credit philosophy, that is, who does the company want to grant credit to and on what terms. The consequences of this philosophy needs to be considered in light of the micro-economic conditions – the company’s competitive position and the macro-economic conditions – what is generally happening in the economy. From the above you can see that credit policies need to be regularly revisited and assessed to make sure that the underlying credit philosophy behind them are sound.

Don’t be afraid to bring in an outside expert to assist in the drafting or reviewing of your company’s credit policy as not only are you getting expert input but you are getting an objective input and the cost of such an exercise is justified by the fact that are probably dealing with your company’s largest liquid asset.