A customer credit policy is an important aspect of any business, as it helps to manage the financial risk associated with extending credit to customers. By setting clear guidelines for credit approval, credit limits, and collections, a credit policy can help to ensure that a business is able to maintain a healthy cash flow and avoid financial losses due to unpaid debts. Additionally, a credit policy can help to build trust and loyalty among customers by providing them with a clear and fair process for obtaining credit. Overall, a well-designed customer credit policy is essential for any business looking to grow and succeed in today’s competitive marketplace.
Below are some easy steps to create a successful customer credit policy –
- All customers must complete a credit application before an account is established. The application should include financial information such as credit references and financial statements.
- Credit limits are established for each customer based on the information provided in the credit application and any additional credit references or financial information obtained.
- Customers would be required to pay for goods or services within the agreed-upon credit terms. These terms will be clearly stated on all invoices.
- A monthly statement of account is sent to all customers with an outstanding balance.
- A past-due notice will be sent to customers who have not paid within the agreed-upon credit terms.
- A collection process will be established for customers who do not pay within the agreed-upon credit terms. This process will include phone calls, email reminders, and letters.
- If a customer’s account becomes seriously delinquent, legal action may be taken to collect the debt.
- Credit will be reviewed on a regular basis, and the credit limit may be reduced or credit may be revoked if a customer’s financial situation changes.
- Any changes to the credit terms must be approved by the management before they are communicated to the customer.
- All credit information should be kept confidential and should be used only for the purpose of credit management.
However, when overdue debts become too high, it can signal that a business’s current customer credit policy is not effectively managing the financial risk associated with extending credit to customers. High levels of overdue debt can put a strain on a company’s cash flow and increase the risk of financial losses. Therefore, in order to protect the financial health of the business, it may be necessary to make changes to the customer credit policy to address the issue of overdue debt.
At Amaze Accounting, we provide you with a complete outsourcing service to manage your Accounts Receivable and Accounts Payable process effectively. We follow a customised process based on your business scenario to manage your vendor and customer relationships while ensuring that your financials are on balance. We help you generate personalised reports to identify key areas for your focus and how you can calibrate your approach to minimise your working capital needs. If you’d like to discuss more on this please book a free consultation right away.
Here’re some of the ways, you can alter your credit policy to make it effective and get back on track –
- Increase credit review frequency: More frequent credit reviews can help identify customers with deteriorating financial situations before their debts become too large.
- Tighten credit terms: Reducing credit terms for all customers or for specific high-risk customers can help to reduce the amount of overdue debt.
- Increase collection efforts: Increasing the frequency and intensity of collection efforts can help to speed up the payment of overdue debts.
- Implement a stricter credit application process: The credit application process can be made more rigorous, to ensure that only customers who are likely to pay on time are approved for credit.
- Implement deposit or advance payment requirements: Requiring a deposit or advance payment from customers can help to reduce the amount of overdue debt.
- Increase the use of credit guarantees and collateral: Asking for a personal guarantee or collateral can help to reduce the risk of overdue debts.
- Implement a dunning process: Dunning process is a series of reminders and warning letters sent to the customers to pay their overdue amount.
- Limit the amount of credit offered to high-risk customers: Limiting the amount of credit offered to high-risk customers can help to reduce the amount of overdue debt.
- Seek external help: if the level of overdue debts is too high, it may be necessary to seek external help such as hiring a collection agency.
It’s worth noting that any changes to the credit policy should be implemented with caution, as they can have a significant impact on the business relationship with its customers. It would be best to consult with legal and financial experts before making any significant changes.
