Credit policy may be defined as setting the frame for determining if the customer is credit suitable. It represents the set of the standards which specify what type of credit what amount a customer can get.
Credit policy has two dimensions:
Credit standards – the essence on which the credit policy is based; the decision on giving the credit relies on the possibility for payment;
Credit analysis – process of determining the probability that the debt will be paid.
Those dimensions are expressing the unique situation of an individual company which is about to make its credit policy, and that is the reason they can’t be classified universally.
The customer information is gathered and analyzed in order to decide about his creditworthiness. The collected info is than sorted by the following order:
Customer’s nature – degree of probability that he will be able to settle the debts in timely manner;
Capital size – general financial condition of the customer, given by the ratio analysis indicators;
Collateral security – assets that will guarantee the payment;
Termsand conditions – external factors that may affect client’s financial condition and his ability to continue with commitments.
Credit policy guidelines
Since there is no universal way to make a credit policy, only guidelines can be given. Usually, the credit policy needs to consider the following:
Credit limits – they should follow the company’s payment policy and special circumstances should be predetermined;
Credit terms – establish the time frame for the payment, which may include lower price if paid early or higher price if delayed;
Deposits – if some part of the amount should be paid in advance;
Credit cards/personalchecks – always check with the bank if cards and checks are valid;
Customer information – see the previous section, terms; basically the relevant information about the customer should be available for checking anytime;
Documentation – such as sales agreement, credit application, contracts, invoices etc.
Importance of invoices
In order to make sure the client will pay in time, the invoice should be created in a way that it is specific, clear and legible. It represents the written proof of the purchase. The good-looking invoice should consist of:
Complete description of the product or service that needs to be paid.