Introduction: Why Credit Policies Matter

In today’s uncertain economy, businesses need more than instinct to manage credit risk. A well-documented credit policy is essential for reducing bad debt, improving cash flow, and supporting sustainable growth. Yet many companies still rely on outdated or unwritten guidelines. Here’s how to build a credit policy that works.

What Is a Credit Policy?

A credit policy is a formal set of rules and procedures that define how your company evaluates creditworthiness, sets payment terms, and handles collections. It ensures consistency, compliance, and transparency across your organization.

Benefits of a Strong Credit Policy

• Reduce Risk: Avoid exposure to high-risk customers.
• Improve Cash Flow: Keep receivables current and predictable.
• Support Growth: Enable safe credit extension to new customers.

6 Key Questions Every Credit Policy Must Answer

1. Mission: What is the credit department’s purpose?
2. Goals: How do you measure success (e.g. DSO targets)?
3. Roles: Who approves credit and manages collections?
4. Evaluation: How do you assess creditworthiness?
5. Collections: What steps do you take for late payments?
6. Terms of Sale: What are your standard and exception terms?

Best Practices for Building Your Policy

• Analyze Your Portfolio: Understand how much credit you can afford to extend.
• Monitor Payment Behavior: Use metrics like DSO and DBT to identify trends.
• Leverage Data & Scores: Incorporate third-party credit data and predictive scores for faster decisions.
• Stay Compliant: Ensure fairness and adherence to trade laws.

Checklist for Credit Applications

Your policy should require key data points such as:

• Legal name and D-U-N-S® Number
• Financial statements
• Trade references
• Ownership details
• Tax ID and insurance coverage

Why This Matters Now

Economic volatility and rising insolvency rates make proactive credit risk management critical. A strong credit policy helps you navigate uncertainty with confidence.

Download our free guide: “How to Write an Effective Credit Policy” and start building a framework that reduces risk and drives growth.
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