Building a Credit Policy That Works

Your credit policy is simply your approach to how you want to make your customers cough up what they owe you. It's really just a system for determining how you are going to collect payment from your customers. It doesn't have to be written down, but it does have to be planned out.

Think of all the possible credit policies that you could adopt as existing along a continuum. At one end of the continuum would be a completely lax credit policy that would allow customers to pay for the goods or services whenever they could. At the other end of the continuum would be a completely tight credit policy that would always require payment in cash up front, before the goods or services are delivered. In the middle would be a credit policy that balanced cash and credit.

Where along the continuum should your policy be? It should be as close to the completely tight end of the continuum as your business conditions will allow. However, reality (and the need to make sales) dictates that, for most of your customers, your approach will be closer to the middle ground. To set up your policy, you'll have to answer three basic questions:

• Which types of credit do you want to offer?
• To whom do you want to offer credit?
• How much credit do you want to offer?