What is credit policy? Explain its variables.

The credit policy is a critical document for any business, but especially one in the credit-heavy construction industry. Your company should clearly lay out its philosophy on extending terms to customers and collecting on overdue accounts. If there’s no plan, there’s no hope for survival.

Simply put, a credit policy is a set of guidelines that sets credit and payment terms for customers and establishes a clear course of action for late payments.

A good policy will generally do four things:

1. Determine which customers are extended credit and billed
2. Set the payment terms for parties to whom credit is extended
3. Define the limits to be set on outstanding credit accounts
4. Outline the steps or procedures used to deal with delinquent accounts

When it’s broken down into its component parts, it establishes how risk averse a company is vis-a-vis extensions of credit and other monetary policies with respect to accounts receivable.

Many businesses rarely extend credit, and require payment immediately upon purchase. For this type of business, a credit policy is a low priority, and for good reason. There isn’t any exposure from extending credit when the business is not in the practice of extending credit to begin with.

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