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What is the importance of credit policy?

GoCardless
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Last editedJun 20223 min read

If you provide your customers with any sort of credit, you must have a credit policy. This protects your company in general and your customer-facing staff in particular. Your credit policy needs to be fair, transparent and robust. With that in mind, here is some guidance on creating and implementing a robust credit policy.

Be clear about what offering credit means

Any time you allow customers to pay after they have received goods or services, you are offering credit. This means that both parties need to be clear on the terms of the credit. The credit terms need to specify:

  1. What is owed

  2. (By) when it is to be paid back

  3. How it is to be paid back

  4. What customers should do if they have issues paying it back

  5. What the merchant will do if the customer fails to uphold the agreement.

All this information should be easily available to the customer. It does not necessarily have to be provided on the same document. For example, an invoice might just cover the first three points and refer customers to online documentation for the second two. It needs to be written in a way that is easy for the customer to understand.

Payment methods and your credit policy

In most cases, it will be obvious what is owed and (by) when it is to be paid back. This means that the first key question is how it is to be paid back. In other words, what payment methods are you going to accept? When considering this question, keep in mind that the easier you make it for a customer to pay, the more likely it is that they will do so.

This is exactly why Direct Debits are the payment method of choice for taking payment in arrears. With Direct Debit, all the customer has to do is set up a mandate. After that, the merchant sets up the payment. The customer doesn’t have to do anything more.

Direct Debits tend to be most useful in situations where a merchant expects to to take payment more than once. They are typically used for collecting subscriptions and instalment payments. They are also a great choice when you’re repeatedly billing someone for variable amounts.

If you only expect to bill someone once, or you want to take an initial payment quickly, then Instant Bank Payments may be a better option. These do require active customer approval but are fast, simple and low-cost for merchants. Instant Bank Payments are also largely protected from chargebacks.

Managing payment issues

A combination of credit checks, effective communication and suitable payment methods should minimise issues with non-payment. There is, however, a difference between minimising and eliminating. That means you do need to have a strategy for managing payment issues. This strategy needs to address three common issues.

Customers forgetting to update their payment details

This isn’t a major issue with Direct Debits as it’s relatively unusual for people to change their banks. It is, however, standard for people to get new payment cards and/or to update the emails they use for the eWallets. It’s also standard for them to forget to update them with some merchants. Generally, these issues can be resolved with a simple reminder.

Customers having difficulties paying

It’s both ethical and practical to work with customers who are having genuine difficulties paying. Usually, the most effective way to do this is to agree on new terms and then create new documentation to reflect them. It’s highly advisable to document any changes properly. This gives you a solid foundation if further action needs to be taken.

If you’re managing recurring payments through GoCardless, you can pause subscriptions. You can also edit the amount charged to the customer. You cannot change the charge date of an existing subscription. You can, however, cancel the subscription and set up a new one with the customer’s preferred payment date. This can be useful if customers change jobs and want to align their payment with their wage or salary.

Customers being difficult about paying

Using Direct Debits can do a lot to prevent customers from delaying or refusing payments. As long as the customer has funds in their account, the payment will be taken in full and on time. You also have the option to use Success+ to reschedule payments that have failed due to a lack of funds. Success+ predicts when the customer is likely to have funds and reschedules the payment for that date.

Beyond this, however, you need to have a written and legally enforceable credit policy. Ideally, this should be owned and managed by people with training and or experience in credit control. If you do not have this skill in-house, it may be advisable to hire an external credit-control specialist.

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