The credit policy is an essential document for any company, but more particularly in the construction sector, which is heavily credit-oriented. Your company should clearly define its philosophy for extending terms to customers and collecting overdue accounts. If there is no plan, there is no hope of survival.
Simply put, a credit policy is a set of guidelines that:
Many businesses, usually retail establishments selling goods or services to individuals, rarely extend credit and require payment upon purchase . For this type of business, a credit policy is not a priority, and that is logical.
For most other businesses, including those in the construction industry, a sound credit policy should be an integral part of the company’s business plan , monetary policy, and overall risk management strategy.
Credit policies define credit terms , credit limits, type of customer to whom credit will be extended (information needed before extending credit to a new customer, i.e. credit report number of years in business, etc.), and policies for dealing with late payments and overdue accounts.
Once you have decided to formalize your credit policy , whether creating it from scratch or building it up from things your company already has in place, the question arises: the following: how can I enhance my credit policy?
The ultimate objective of all credit policies is to maximize the company’s income , activity while minimizing the risks generated by the granting of credit. Credit policies are generally not ready-made or take-home products. The means to achieve this can vary depending on many factors , such as the size of the business, the specific cash flow of the business, the industry the business is in as well as the general economic climate. Let’s discover below the 6 steps to define an effective credit policy .