How to Create a Credit Policy for Your Small Business
If you’re looking for new ways to appeal to your customers, especially in times where they may not be as willing to make large purchases, consider offering extended credit to them. Studies have shown that people spend more money when they are able to pay with credit. Learn more about how a credit policy might benefit you and how to create one for your small business.
What is a Credit Policy?
A credit policy is a policy that is based on the idea of lending money to someone with the intentions of being paid back later. The credit policy puts into place strict rules about lending. A good credit policy will determine who can receive credit, how much credit they can receive, how it will be paid, and what happens if payment is not received.
For most companies, a credit policy may not be needed. Most companies prefer to collect payments for items upfront. However, for companies that do need credit policies, it is important to realize that you put yourself at risk by lending credit. If the person being given the credit doesn't pay, you will be put in a hard position. You must make a plan that helps to eliminate the risk as much as possible.
Set Credit Limits
The best place to start is to first figure out how much you can afford to lend as credit. Keep in mind the size of your company and how big of a hit the company would take if the borrower does not pay. Bigger companies can afford to lend more than smaller companies.
Decide Who to Lend to
Once you figure out the credit limits, you should figure out the requirements for a borrower to receive the credit. For example, you want to make sure that the borrowers are employed so that the borrowers are more likely to pay back the money. But how long should they have to be employed before getting to apply for credit? A long duration of employment can show a creditor that the customer is more than likely to be employed with stable income when the times comes to make a payment.
Another thing to consider is credit history. Credit history shows how a borrower has handled past financial responsibilities and if they have any debts that may get in the way of paying back your lent credit. You can contact credit reporting agencies such as Experian, Transunion, and Equifax to determine a borrower's credit history.
Set Your Terms
Decide how many payments will be required and how long the borrowers will have to pay back the full amount. Also decide the due dates of when the payments are due and percentage of interest on loans so that borrowers know exactly what they are getting into when they borrow from you.
Make sure that you decide how to pursue non-payment. You may send reminders, send the account to a collections agency, or terminate the account.
Also be sure to figure out when exactly a non-payment should be taken a step further from a ‘reminder’ to taking serious action regarding the account. Make sure to include all of this information clearly in your credit application.
Make an Invoice Template
The next step after you have figured out how things will work and who you will lend to is to make an invoice template. An invoice tells the borrower that they owe money for a purchase made using the lent credit and includes detail about the purchase. The invoice also states that the money is due on a certain due date and if the customer does not make a payment by that date then late fees will apply (If any). Also, be sure to include how to make a payment.
Talk to the Professionals
Make sure that you discuss your credit policy with a professional such as a business lawyer that can make sure that everything looks good. The lawyer can check on your wording and make sure that there aren’t any hidden loopholes in your policy or things that you missed.
Establish the Policy
Policies are different for each company and should be individualized for the specific company to better match the company’s needs. After you make the policy, make sure that it is clearly stated and easily accessible to others. If you have more questions about making a credit policy or just need help with accounting for your small business, contact Infinity Bookkeepers! Our fixed-fee price model makes sure that you get unlimited support through all of your business’s big decisions.