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Credit Policy and Procedure Manual
By Michael C. Dennis, MBA, CBF

Credit Policy Articles
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The Importance of Having a Written Credit and Collection Policy and Procedure Manual

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 guarantee?

  • 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 of sale?

  • 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 limit?

  • What are the consequences of exceeding this authority limit?

  • Who in management can override credit decisions?

  • What form does that override take?

  • Will the company sell to a debtor in possession?

  • 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 updated?

  • 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 hold?

  • How will this notification take place?

  • Who has the authority to withdraw open account terms?

  • Who has the authority to place accounts for collection?

  • 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 process.

  • 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 stale.

  • 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 accounts

  • 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 of interest.

  • 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 wiggle room:

"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 file."

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 and handling.

Republished in the March 2004 Edition of NACM's "Business Credit Magazine"

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