Do You Have a Credit Policy for Your Organization?
To get a credit card, a mortgage or a car loan, what’s the first thing you have to do? That’s right, you need to apply: you fill out a form, give a lender enough information to make an informed decision and, with any luck, the lender approves your request. Sometimes, the credit being offered is unsecured, like for most credit cards; sometimes there are security or collateral requirements, like your house which secures your mortgage or your car, which secures your car loan. If you don’t make your payments as agreed, then you default on the credit and chances are the lender will seize the security that you pledged to cover the debt that is owed.
If your business lets your customers receive goods or services now in return for a promise to pay later, then your business grants credit. And you are not alone. Most businesses grant a credit to their customers, especially if their customers are other businesses (B2B—business-to-business). In fact, this is the most common type of credit offered in the business world and most of the credit offered in this way is unsecured.
Do you treat a request for a $5,000 credit limit the same way you treat a request for $10 Million? I don’t think so. Every business that grants credit should have a set of rules which guides staff in what to do about credit. This set of rules is called the credit policy and this policy should provide enough detail for staff to know what to do. It should specify what they can do on their own and when approval from someone more senior is required.
This policy should cover all the steps, from applying for credit to the collection of the debt. Credit policy should spell out what information is needed (on an application) to approve an initial request for each client. Should accounts be reviewed periodically? The policy should specify when a review is required, how much information is needed and how much time should go into a review. Should customers have to provide financial statement information along with their application? The policy should tell staff when financial information is required. If you want to know what to do about accounts that are past due or over the limit, the policy should make that clear. What about payment terms and payment methods? Staff should be able to refer to the policy to get the answers. The policy should also cover subjects such as write-offs, bad debt provisioning and delegated authorities.
In sum, you may be saying to yourself, great, but how do we do this and what should our policy look like? Start by asking the staff on your credit team what they think and go from there. And if you are really stuck for answers, reach out to the Credit Institute of Canada, who can recommend best practices to help you out or sign up for a brief professional development seminar regarding this topic.