Credit Policy

When running almost any business, a credit policy is indispensable. This document will outline your company’s stance on extending credit to customers and the terms and conditions of that credit. There are several components of a good policy, and it’s essential to get them all right. Here, we’ll discuss what goes into credit operations and how you can create a policy for your own business.

What Is a Credit Extension Policy?

It refers to the formal and documented procedure for extending credit. Generally, it should include these components of credit policy documents.

Credit Limits

What is the total amount of credit you can afford to extend to customers? You should consider the overall total vs. what you can afford to extend to each customer. Then, review customers’ creditworthiness before determining how much of that limit they become eligible to access.

Eligibility Requirements

What do customers need to meet before they’re eligible for credit with your business? These are a few factors you should review before making a final decision:

  • Payment history with your company and other vendors
  • Any outstanding balances they have with other creditors
  • Personal and business credit report or score
  • Any bankruptcies or liens against them

Credit Terms

What are the terms of credit extension after approval? Make clear decisions regarding these and other important factors:

  • Whether they need to deposit a portion of the amount borrowed
  • The interest rate you’ll charge on the outstanding balance
  • How long they have to pay off the balance
  • What payment methods you accept
  • What happens if they don’t make payments on time

Documentation or Contracts

Finally, your policy should determine what documentation or contracts you’ll require from customers before extending credit. Sometimes, portions of the procedure might lead to the creation of documents, such as contracts formalizing the terms. Consider the following documentation examples:

  • Credit applications
  • Purchase orders
  • Delivery receipts
  • Sales contracts
  • Bills of lading
  • Modifications

How to Develop a Business Credit Policy

If you’re starting from scratch, you might be wondering how to develop a credit extension policy for your business. You’ll find that the steps correlate with the components of credit policy:

  1. Set credit limits. These will depend on your business’s cash flow and the creditworthiness of your customers.
  2. Establish eligibility requirements for your customers. Doing this will help you screen out those who are not likely to repay their debts.
  3. Set credit terms. These will include the interest rate you’ll charge and the time frame in which customers must repay their debts.
  4. Develop documentation or contracts for your customers. Formalizing the credit policy of a company protects the business in the event of a dispute.

Why Are Business Credit Policies Important?

In the past, businesses often operated without any formal contracts in place. People shook hands to formalize deals instead of signing on a dotted line. Over time, this practice became problematic, primarily when disputes arose. Formalizing credit policies can reduce the risk of these and other problems. Here are some of the many reasons you should establish a clear policy:

  • It helps you avoid bad debt by screening customers before extending credit to them.
  • It allows you to track how much credit you’re extending and to whom.
  • It gives you a way to collect payments if customers don’t pay on time.
  • It reduces the possibility of prejudices against eligible customers from marginalized groups.
  • It reduces the risk of fraud and other unethical or illegal practices.

Some companies have so perfected their business credit policies that they have automated the process. Customers can know via a simple online application whether they qualify for credit and how much they can receive. Even without automation, having a formal policy in place can drastically improve the efficiency of your business and reduce undue pressure on your accounts receivable team.

Those that are familiar with the workforce management space need no introduction to and its powerful work OS tool. recently moved to an automated accounts receivable (A/R) collection system, powered by Gaviti, to replace its outdated annual reporting methodology.

From’s accounts receivables department:

With our business and sales growing exponentially, Gaviti has been a key tool in ensuring our DSO has not only stopped increasing but also shown improvements over a relatively short period of time. The ease of use combined with a highly responsive and helpful team… We have been able to quickly implement a comprehensive and versatile collections process.

When you stop to consider the broader, organizational benefits of automated A/R solutions, it’s easy to understand why was so successful. The right A/R collection software can improve cash flow as well as the performance of key metrics – such as days sales outstanding (DSO) – within your organization.

Improve DSO Collection Processes

At its core, DSO collection is a cash flow problem. According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management.

Part of this issue is attributable to the time-consuming processes inherent in manual collections. DSO collections and cash flow already vary from month to month. When you add the time spent managing spreadsheets across late payments, grace periods, and lines of credit, you have an untenable system where staff spends more time corralling reports than processing payments. And while you may not enjoy managing the nitty-gritty details of your business’s finances, your financial processes are ripe for optimization. Consider just a few ways that accounts receivable collection software can streamline your enterprise DSO:

When you work to improve your accounts receivable collection, you’re working toward a healthy financial process where DSO stays low. But that’s not the only benefit of an A/R collection solution.

Stay Informed

5 Benefits of Automated Accounts Receivable Collection

In any discussion about the benefits of accounts receivable automation, it’s important to cover the broader benefits it provides:

  1. Better staff efficiency by reducing the manual hours required to perform collections tasks – all those hours you spend chasing invoices, calling clients, or writing follow-up emails add up.

  2. Ensure your data’s accuracy – real-time accurate data will prevent your company from making errors.


The benefits of the accounts receivable collection software are clear, and once you’ve deployed
you’ll have a hard time going back.

A/R Collections Best Practices

Although automated accounts receivable software brings a new dimension to your financial processes, the fundamentals of accounts receivable best practices remain the same. It’s a straightforward process that nevertheless tends to get bogged down by inefficiency. This is where automation software pays off.

Consider how you can leverage financial technology like this throughout your organization to improve key financial metrics. Technology is one option. Outsourcing accounts receivable collections to a service provider that can handle all the details for you is another. You have plenty of options, and now it’s just a matter of selecting which improvements will yield the best results for your enterprise.

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