Credit Policy Standards & Procedure

Industry Needs and Standards

You need to know how and why credit is used in your industry. Does your industry need 60 days credit to complete the cash cycle being: your customer buys goods from you (to fill an order placed by their customer), they then produce those goods within 30 days, they then invoice their customer allowing a further 30 days- a total of 60 days.

If 60 days are normal, you should accept this from the start and cater for the delay in your pricing.

If the standard for your industry is 30 days from invoice, then you can offer a discount if the invoice is paid WITHIN 30 days. If your customer is taking 60 days (when the average is say 53 days for the industry) then you know that your standards are lower than the industry standard. And that your customer is unlikely to obtain more time to pay from another similar company (regardless of what the customer may say). A full credit reference report will provide industry averages.
Company Needs and Standards

Do you supply credit to your customers because your competitors do? The obvious answer is yes!

Do you have the financial ability to provide a profitable credit facility? If you are a small business using an overdraft facility at 4-5% over the bank base rate, you need above average profits.
It is better to offer genuine discounts than offer credit when your cost of borrowing is high. It is arguable whether or not to lose a credit sale if that sale could put your cash flow at risk.

Before you turn down a sale, tell the customer that you do not offer credit for large sales or, you do not offer credit because you want to tightly control your cash or, you want your company to grow without the cost of bank borrowing. The customer will understand your concern and may well pay cash if you come across to them as a businessperson that is in control.

Have you considered, for example?
1)increased discount for immediate payment of invoice

2) buy three get one free, again, with immediate payment of invoice

3) provide your customer with stock to increase your market penetration: the stock is conditional to immediate payment on sale. Make sure your customer is financially stable. You can offset the cost of supplying stock by having a similar arrangement with your own suppliers.

4) take deposits for special orders, or where you have doubt (but not too much doubt) about your customer’s liquidity.

5) do something to make your customer want to pay you (something nice!)
Do you have some customers who never pay on time? When was the last time you sat down with them and said, “what can you or I do to ensure payment is within our terms & conditions”: if they say you did not seem that bothered about it before, don’t be surprised!

Most importantly, make sure you use credit to drive your sales, and not to support your sales. This means that if you offer your customer “around 30 days credit” you are using credit to support your sales. If you tell your customer you have a “strict” 30 day policy, however, you will allow a 2% discount for payment within 7, 14, 21 days: you are using credit to drive your sales.

Good relationships are two-way. Make sure