The Importance of Having a Written Credit and Collection Policy and
Many companies do not have a written
credit policy. There are a variety of reasons for this.
Perhaps the most prevalent is the belief that a written
policy is more trouble than it is worth, or that the
policy once completed will quickly be forgotten or
ignored. One of the benefits of a written policy is
the fact that it will reduce bias and subjectivity
in the credit decisions being made.
Advantages: There are a number of advantages or valid reasons
for investing the time and effort to develop a written credit
policy. Among the more important reasons are:
A written policy is one way to ensure
continuity in the department in the event that key
personnel leave the credit department.
A written policy helps ensure consistent
credit decisions - meaning that all customers will
be treated fairly.
It can be used as a training tool.
It can be used to help evaluate or
benchmark job performance against established standards
documented in the policies and procedures manual.
The manual can be presented to senior
management to ensure consistency between credit department
operations and management's expectations.
Relevance: A policy must be relevant
to the way the credit department actually operates.
To be relevant, the credit policy must be current and
it must be kept current.
Key Questions a Credit Policy Must Answer
A well-written credit policy will answer
the following questions:
Will a credit application be required?
Must it be signed? If so, by who?
Will the application include a personal
When must it be signed?
Will the guarantor be required to
provide personal financial statements?
How will the creditworthiness of the
guarantor be confirmed?
What are the company's standard terms
Under what circumstances will extended
dating be considered?
Who must approve requests for extended
dating, and what form will this approval take?
What is the credit manager's authority
What are the consequences of exceeding
this authority limit?
Who in management can override credit
What form does that override take?
Will the company sell to a debtor
If so, under what conditions?
What forms of security will the company
accept to reduce credit risk?
Under what conditions will the company
request updated financial statements? Under what conditions
will we require financial statements?
How frequently will credit files be
Who will review the information, and
what constitutes an unacceptable credit risk?
How frequently will customers be contacted
about past due balances?
How soon will the customers be contacted?
At what point may orders be placed
on credit hold?
Who authorizes credit holds?
Who must be informed of the credit
How will this notification take place?
Who has the authority to withdraw
open account terms?
Who has the authority to place accounts
What methodology will be used to calculate
bad debt reserves?
When will accounts be considered eligible
for write off?
Credit Policy Do's and Dont's.
Whether you are writing a new policy and procedure
manual, or you are reviewing and updating your current
manual, you should keep these ideas in mind:
Do not keep your credit policy a secret. Be certain
to share it with your sales department and with senior management.
Do not make your policy so rigid that that you
do not have a certain amount of 'wiggle room' in your credit decision-making
Do not make the policy so vague or flexible that
it is subject to interpretation by each member of the credit department.
Do update your credit policy so it does not go
Do not allow your subordinates to stray from your
credit policies and procedures without providing an explanation.
Do establish a specific hierarchy within the credit
operation. Make certain that everyone with credit granting authority
knows his or her credit approval limit.
Do make sure your policy explicitly states that
the credit department is 'pro' sales. Make certain you are looking
for reasons to release orders, not excuses to hold orders.
Do include policies intended to manage marginal
Do include policies and procedures intended to
minimize credit risk and the potential for bad debt losses.
Do include instructions about how confidential
information will be kept confidential.
Do include examples of actual or potential conflicts
Do state clearly in the manual that employees
may not engage in unethical or unlawful behavior and include examples
of these prohibited behaviors.
Do not create a credit policy that has the effect
of isolating the credit department from the rest of the company.
The credit department must be a part of the success of the company
as a whole, and not apart from the company's success or failure.
An area that often causes problems for the credit
department involves the use of credit holds. Salespeople
often think the credit department is too quick to impose
credit holds...but if the credit policy manual addressed
this issue, it would be clear to the sales department
and to senior management why the decision to hold orders
was made. Here is an example of a credit hold policy
that gives the credit department a certain amount of
"All customers will be considered eligible for credit
hold once their account contains an undisputed balance
that is more than 30 days past due. All accounts that
become 60 days past due shall be placed on credit hold
unless specifically exempted by the credit manager.
The reason[s] for approving this type of exception
must be documented in writing and added to the on line
credit notes with a copy placed in the customer's credit
Having a written credit policy in place and up-to-date
is a way of preventing problems and minimizing the
loss of customer goodwill. For example, if your written
policy states that you require current financial statements
any time an applicant requests a credit limit in excess
of $100,000 and you make this fact known to your sales
department [through regular meetings between credit
and sales] and if you tell potential customers this
information by including this requirement on your credit
application form problems with customers [and potential
customers] could be avoided.
Michael C. Dennis is a business consultant that helps
companies to design, implement and update their credit
policies. He is the author of four books on the topic
of commercial credit risk management and debt collection
including his most recent book, "1001 Collection Tools,
Tips and Techniques" which contains more than 100 pages
of collection ideas for commercial collectors. This
book sells for $27.95 including sales tax, shipping
Republished in the March 2004 Edition of NACM's "Business