If you have realized that extending credit is right for your business, and have learned how net terms can both increase sales and strengthen customer relationships, no worries, implementing the actual credit policy is a lot more simple that you might suppose. Follow our guide to building the most effective credit policy for your business:
BUILDING A CORPORATE CREDIT POLICY FROM SCRATCH
GENERAL POLICY STATEMENT
To begin extending credit, it’s best to start by creating a general policy statement. Think of your general policy statement as the summary of your company’s entire credit policy. It first needs to explain the purpose of the credit policy (in a way that makes sense to noncredit professionals). For example, it should answer the question, WHY you are extending credit. A good answer? Explaining that sales are vital to the growth and profitability of your company, and credit allows you to increase these sales and customer satisfaction. Also your policy should state to WHOM you will extend credit. A good answer? To all applicants who fall in a certain risk parameter (that you must define). It would be good to include a note that explains that all credit decisions will be made on a realistic appraisal of verified information to determine each customer’s ability and willingness to pay according to your credit terms.
OBJECTIVES OF YOUR CREDIT POLICY
Let’s break down the purpose of your policy a little bit more. The entire objective of your credit policy should be to enhance your sales process. You must work to find the basis on which to do business with your customers and do not deny customers the opportunity to purchase from you until they have broken your policy. To create efficiency, the organization of your policy should be clearly stated, along with responsibilities your employees will have in enforcing these things. Be sure to outline that the entire point of the policy is to build strong, deep customer relationships. The objectives of your policy are aiming to inform your employees more so than your customers.
APPROVING CUSTOMERS FOR CREDIT
After your customers have filled out the credit application, it’s your job to decide if they are creditworthy. Be sure they have provided all the information you need to make this decision. What’s a MUST HAVE on the application? Bank references, trade references, business details (type of structure, years in business), and other qualifiers such as the credit history of the principals or a personal guarantee. Visit our full list of application necessities here. Remember, the application is designed to bring together all the information you need to figure out the financial behavior of a customer. Without full disclosure, your credit approval process will be hindered.
TERMS OF SALE
Once approving (or not approving) customers for credit, be sure to explain exactly what payment terms they are being offered (and if they aren’t, why). Be sure to let them know if you reward early payments. Keep all terms in writing, and make sure the customer is aware of any late charges you have (but always check state usury laws before establishing late charges).
REVIEWING CREDIT LIMITS
You should be prepared to conduct annual (if not more) reviews of your customers’ credit lines to identify any possible problems they are having financially (or if any of your customers deserve even more credit!) Why would you increase the customer’s credit limit? If they have been proving themselves as an on-time payer, or even an early payer, and their credit history still looks sharp. And, of course you would decrease their limit if they are having poor payment performance (or if you saw on their credit report that their finances were in trouble).
CORRESPONDING WITH YOUR CUSTOMERS
So how do you make all these things clear? When introducing your policy to your customers, make sure you keep your customer informed on all the details, as well as anyone in your company who would be dealing with this customer. Ways to keep them informed:
Announcement of credit extension – This let’s your customer know how much credit they have received, and what they have to do to earn more.
Denying credit – Explains to customers that they won’t be receiving credit, tells them what they must do to earn it and talks them through the COD (cash on delivery) or cash in advance procedures.
Periodic review of credit line – Informs the customer that their credit line has been increased or decreased.
Discount letter – Advises the customer of their savings from taking advantage of any prompt payment discounts.
Remaining credit balance – Reminds the customer of their credit balance and encourages the customer to place an order to take advantage of the available credit.
Understand that is it okay to make some exceptions with your credit policy. However, make these exceptions official by getting them in writing, so everybody is aware of the changes being made. Implementing a policy requires thought and planning to make sure it functions at full efficiency for both yourself and your customers.