Last editedMay 20222 min read
Having a good credit policy in place is imperative to the success of small businesses. Ideally, this credit policy will be in place from the minute you start operating.
In this post, we’ll take you through a definition of credit policy and delve into the various benefits of having a rigid and organised policy in place.
What is a credit policy?
A credit policy refers to the terms with which customers are granted credit. It usually involves clearly outlined payment terms and conditions. A credit policy should aim to minimise risk while simultaneously maximising opportunities to secure sales and attract customers.
Trading on credit is a payment type commonly utilised in the B2B environment. Extending credit to customers can help create a sense of trust between companies and individuals, which can help foster a positive business relationship. However, when it’s poorly managed, it can lead to severe cash flow problems.
Credit control and policy is therefore a delicate balancing act which requires effective management. The goal is always to keep risks to an absolute minimum by only offering credit to trustworthy clients.
To avoid issues, payment terms should always be expressly stipulated, and conditions, including late settlement fees, due date and payment method, should be clearly outlined. Payment length should also be decided carefully, as the longer it takes for the business to receive their full payment, the more likely it is that cash flow problems will emerge.
What is credit management?
Credit management refers to all the processes within a business that are involved in managing credit policy, from its terms to its actualisation. Some businesses will have a dedicated credit manager who oversees credit policy decisions and operations.
Benefits of credit policy
When small businesses offer credit in a controlled and risk-aware manner, it can lead to a number of benefits. Some of these are outlined below:
Can save you time
Provided you’ve carried out your risk-aversion checks, you will be extending credit to reliable customers who are more likely to pay on time. Having a solid credit control protocol in place from the get-go can therefore save you time chasing up late payments from undependable customers.
Can help you plan your cash flow
With precise payment terms and due dates, credit policy can help you forecast your company cash flow. This is because you will know precisely when payment instalments will be arriving in the following weeks or months.
With GoCardless, businesses can easily set up instalment payments via a series of Direct Debits.
Builds trust with clients
Having a good working relationship with customers is crucial when it comes to both retaining and growing your client base. Offering credit to customers can help create an environment of trust, which can lead to a more positive experience overall for customer and company alike.
With a strong and detailed credit policy, there will be no room for subjective decision making vis-a-vis who is eligible for credit. This can keep risks to a minimum by helping ensure invoices and payments are made on time. Plus, it can save you time — both at the decision making stage and later as you won’t need to waste time chasing payments.
Fosters a healthy financial outlook
Having a clear and exhaustive credit policy in place can pave the way to having smooth operations in other financial aspects of your business, including accounts receivable and cash flow management.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.