A Credit Policy to protect your most valuable asset

It’s a human fact that as an SME owner, you cannot possibly be the expert in all areas of your business, and yet you need to understand all aspects.  So where do you begin when customers start asking for extended credit on their purchases and you don’t want to lose the sales? Since the accounts receivable ledger is often considered to be your number one asset on the balance sheet, a credit policy is necessary if you offer credit to your customers.

A credit policy provides your business with a framework to implement finance-related risk management strategies, such as making the most of your Terms & Conditions to provide optimal protection, knowing who your customers are, and of course monitoring your accounts.

An effective credit policy generally covers the below areas:

Mission statement

A mission statement defines what you wish to achieve by having a credit policy in place.  Knowing why you are creating the credit policy sets a clear focus for the business owner and those responsible for looking after the accounts receivable ledger.

Credit leadership and goals

By credit leadership I mean creating boundaries for our customers based on our credit policy and terms to reach the goals of our mission. The credit policy becomes the backbone of a collection procedure, and as a credit leader you need to show consistency in dealing with your customers and understanding who you are dealing with.

Legal requirements

Terms and Conditions form the legal platform of how you are conducting business with your customers and should be drawn up by a solicitor. This document should be available to all your customers (cash or credit) and specifically cover securitisation, terms of trade, jurisdiction, Privacy Act (1988) and Privacy Amendment (Enhancing Privacy Protection) Act 2012, and the Personal Property Securities Act 2009.

This information, when worded correctly and implemented accordingly, is valuable when your customer is refusing to pay or trying to retrieve your goods or proceeds of sale from a liquidator.

Credit facilities

Credit terms should only be granted when due diligence is conducted in assessing new credit applications where valuable insight can be gained about your customer and whether they are credit-worthy.  Once approved, the most common credit terms given are 30 days either from invoice date or end of month. By implementing a credit limit you have a strong potential to control your customer’s spending and minimise risk. Be specific in determining what credit limit is suitable for you and your customer’s needs.

It’s also a good idea to state in a credit policy when accounts are to be placed on stop credit  for non-payment of account or when exceeding their credit limit to minimise your exposure.

Dispute resolution

It is not only good customer service to have a process that promptly deals with disputes, it also keeps your accounts receivable ledger clean.  It’s a fact that the older the debt becomes, the harder it is to collect.

Account monitoring 

Account monitoring works best if a collection procedure, based on a credit policy, is implemented. This also assists in shaping your customer’s payment behaviour and before you know it, Ka-ching! Money is coming in on time! Determining when to start calling your customers, having a fantastic customer relationship, consistent follow up (in line with legal requirements) and reminder letters are all part of effective risk management strategies.

Legal recovery

There are many cost-effective external mercantile agencies that will act on your behalf to collect the debt and where possible avoid legal action as this can be a costly exercise. Terms and Conditions should include a clause to state that all associated recovery costs are payable by your customer.

Through implementing simple risk management strategies into a credit policy, business owners are better prepared in mitigating risks associated with bad debt.  It allows you to make informed decisions to minimise risk whilst advancing the growth of your business by extending credit comfortably.

Disclaimer: the information contained in this article does not substitute for legal advice and should be used as guidance only