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Basic Outline for Developing a Credit Policy

Updated: November 2015

Credit Policy:  Document providing “clear, written guidelines that set (1) the terms and conditions for supplying goods or services on credit, (2) customer qualification criteria, (3) procedures for making collections and (4) steps to be taken in case of customer delinquency.” (

  • A credit policy, however, should be more than a list of credit department guidelines. Properly developed, it can be a critical tool for maintaining alignment on credit issues throughout your company.

  • A well-written, comprehensive credit policy communicates a consistent standard to your customers. It documents and supports corporate goals, clarifies authorization levels, defines expectations and responsibilities and enhances cross-functional cooperation especially between the credit and sales departments.

Sounds great, right? So, where do you begin?

While there is no single definitive credit policy, this article outlines some of the items you should include. We have also provided sample text you can edit and customize for use in creating a credit policy that meets the needs of your particular organization.

Outline of a Credit Policy

Section 1: Credit Department Mission

Start by developing your mission statement. You will want to get input from upper level management and the sales department. It’s important that Sales understands how the credit department will work to help ensure their success within the corporate guidelines.

The credit department mission should fully align with the corporate mission. Policies should reflect corporate goals within its specific industry, as well as the company's capacity for risk. For instance, new companies may have to take on higher risk customers in order to develop market share. Firmly established organizations may be able to control their credit risk more stringently.

Sample Text for Credit Department Mission

  • To support the financial goals of [company] and, specifically, to support its sales efforts, while maintaining the highest quality of accounts receivable within the corporation’s capacity for risk.

  • To provide flexible mechanisms to sell to a broad range of customers while ensuring that only prudent credit risks are taken and cash flow is maintained.

  • To maintain customer goodwill during the collection process.To keep Sales and senior management informed about emerging problems including noncollectable accounts and order holds.

Section 2: Credit Department Goals

Goals should be set based on your company’s cash flow requirements. They should track with current market conditions, reflect the strategic direction of the organization, support sales objectives, and change based on the general economic situation and the financial requirements of the company.

Any targets selected should be based on industry benchmarks, where possible, or on improving your own past results.

Some possible goals might be:

  • To open XX new accounts during the course of the year.

  • A target for the percentage of bad debts to sales.

  • Percentage targets for acceptable account aging, i.e. % current, average days delinquent, percent over 90 days past due.

  • Targets for typical receivables ratios used by your department, i.e. Collection Effectiveness Index (CEI), Days Sales Outstanding (DSO), percentage of sales ultimately written off, etc.

Section 3: Roles, Responsibilities and Authorization Level

This section should contain a brief description of the roles and responsibilities of each department member. You can include written job descriptions, if desired.

Sample Text

  • CFO: Ultimate authority for Credit Department; hires/fires, sets overall policy.

  • Credit Director/Manager:  Reports to the CFO. Plans, organizes, leads and controls the credit function. Responsible for day-to-day management and training of the credit staff, determines procedures and rules for the entire department, authorizes credit limits over $500.00. Selects outside collection agencies and/or outsourcing firms with the approval of the CFO.

  • Billing/Invoicing Manager: Reports to the Credit Manager. Responsible for the day-to-day management and training of the personnel within the Billing Department, maintaining high standards of invoice accuracy, handling invoicing disputes, deductions and all matters pertaining to billing. Reviews the daily aging report.

  • Collections Manager: Reports to the Credit Manager. Responsible for the day-to-day management and training of the in-house collection team. Coordinates with outside collection agencies. Has input into the selection of any outside collection resources. Authorizes payment terms with the approval of the Credit Director.

  • Credit Analyst: Reports to the Credit Manager. Obtains and analyzes financials, analyzes credit reports for clients requesting credit limits of more than $500, assigns credit limits up to $250.00.

  • Billing Clerk: Reports to the Billing Manager. Responsible for preparing the invoices and ensuring that they are sent on time, maintains the aging report, provides other support services to the Billing Manager as required.

  • Collection Specialist: Reports to the Collections Manager. Contacts past due accounts per requirements. Accepts payment terms with the approval of the Collections Manager. Maintains records in collection system.

  • Credit and Collection Assistant: Obtains signed credit applications, reviews for completeness. Requests credit references and follows up. Pulls credit reports. Provides other support functions as needed.

Section 4: Procedures

This is the nuts and bolts of your credit policy. It’s essential that the rules apply to all customers, with very few exceptions, and that they are consistently enforced. The procedures should be somewhat flexible, but not so vague that they are subject to interpretation by every member of the department. Situations where flexibility is possible and the hierarchy for approval of changes should be well defined.

As with your goals, the procedures should update periodically to take advantage of best practices, technology, or anything new that can improve your processes and results.

In this section, include the processes for:

  1. Evaluating New Customers’ Creditworthiness
    • Sources of information you can leverage to help determine credit risk are: industry credit groups, credit bureau reports, financial statements, credit references, public records, and information provided by applicants. 
    Sample Matrix

Requested Credit Limit 

Credit Application Completed and Signed

Check References

Obtain Credit Report

Initial Terms

Credit Limit






Prepaid then Net 30






Basic Report

Due on Receipt then Net 30


Credit Manager


Yes w/signed personal
guarantee & financials


Full Report

50% on 1st order then
Net 30


Credit Manager

Sample Text regarding the Credit Application 

  1. Reevaluating the Creditworthiness of Existing Customers
    • Reevaluate the credit histories of existing customers on a regular basis – at least annually. It’s a good idea to create a schedule (or matrix) for reevaluation, perhaps based on the size of the customer’s credit limit. You’ll also want to define exactly what your department needs to review: credit report, financials, credit group information, etc.

  1. Terms and Conditions of Sale
    • Your terms and conditions of sale protect your rights as a seller. They should be included on all sales documents. They should be included on your credit application together with a statement requiring a signature, for example: “I have read and agree to the terms and conditions as stated on this document.”

    • Terms should also be included on sales contracts, orders and invoices, even emails related to the sale. In addition, you may want to require large customers to sign an annual sales or credit contract, which would include your terms of sale and their credit limit.

    • The sample matrix above assumes that the customer was found to be creditworthy. What about customers that are borderline? Remember your mission: "To provide flexible mechanisms to sell to a broad range of customers while ensuring that only prudent credit risks are taken and cash flow is maintained."

    • It's the credit manager's job to look for new and innovative ways to sell to marginal accounts. Rather than declining them out of hand, consider prepayment on the first order, security (UCC9), 50% down payment … For international customers, consider using D/Ps, D/As or L/Cs to provide a greater level of security than open account. (See "D/P, D/A and International Sales Transactions")

  1. Invoicing
    • Sample Text for Invoicing Procedures
      • All invoices should be issued within 24 hours of the merchandise being shipped.
      • Invoices must contain:
        • Name and address of the customer.
        • Remittance address or electronic transfer information (ACH, wire)
        • Contact information for inquiries/questions
        • Terms and conditions of sale
        • Invoice number, order number, customer’s PO number
        • Description of merchandise or services
        • Unit prices, total amount due
        • Shipment date and method of shipment
        • Due date, discounts (if any)

    • The aging report of all invoices must be kept updated on a daily basis by the billing clerk. This aging report must be checked once per week by the Billing Manager to ensure accurate aging information. Aging information is provided to the Collections Manager for appropriate handling.

  1. Collections
    • Even with your best efforts to carefully and consistently manage your receivables, there will be some accounts that don’t get paid on time.

    • Having a plan for handling these accounts quickly and actively can increase the likelihood of collecting past due amounts. In fact, we recommend starting your contacts before the invoice actually becomes due, at least on larger accounts.

Sample Collections Matrix (Net 30 terms)

From Oldest Invoice Date 

Portfolio A $5000+

Portfolio B

Portfolio C

Portfolio D <$500

0-20 days





20-30 days

Current-F/U Call

Current-F/U Call

Current-F/U Ltr/Email


37-40 days

In-House F/U Call

In-House F/U Call

F/U Collection Ltr/Email

F/U Collection Ltr/Email

45-50 days

In-House Collection Call #1

In-House Collection Call #1

In-House Collection Call #1

 In-House Collection Ltr #1

55-60 days

Escalation to Collections Mgr-collection call; credit hold

In-House Collection Call #2

In-House Collection Call #2

In-House Collection Ltr #2

65-70 days

Review by Credit Mgr-Final Demand Call

Escalation to Collection Mgr; Final Demand Call; credit hold

In-House Final Demand Call; credit hold

Final Demand Letter; credit hold

75-90 days

To 3rd-party agency

Review by Credit Mgr; to agency

to 3rd-party agency

to agency

Sample Text

    • The calls and letters at 20-30 days should ask: if the shipment was received, if there were any issues with the service/products, if the invoice was accurate, remind the customer of the payment due date and ask if there is any reason that the invoice might not be paid on time. (See "Nine Collection Tips for Small Business"). 

    • The follow-up calls, letters and emails at 37-40 days are to be cordial reminders of the invoice due date and determine if the customer has any problems with paying.

    • The collection calls, letters and emails at 45-50 days should be firm requests for payment.

    • Depending upon the results of your in-house efforts, you could bump up the period when you place with the 3rd-party collection agency, or hang onto the account a bit longer. However, it’s not recommended that you hold any account longer than 90 days past the due date. (See "B2B Collection Agency Placement Strategies: Beyond Aging Out").

Other items you may want to include in this section of your credit policy:

    • Disputes and Deductions: How to respond. Who has authority to approve.
    • Credit Holds: When to place an account on credit hold. Who authorizes credit holds.
    • Payment Plans: Who can propose and approve payment restructuring plans.
    • Write-offs: When to write off an account to bad debt.
    • 3rd-party Collections: When and who authorizes forwarding an account to a 3rd-party collection agency.
    • Law Suits: How to determine whether to sue.

Section 5: Measuring Results

Now that you have a credit policy in place, it’s time to measure its effectiveness. This should be done at least quarterly.

Start with your aging analysis. Follow with the metrics listed in the Goals (Section 2) of this document. Look at the impact your credit policy has on sales and cash reserves. And, if necessary, revise the policy based on your findings.


A credit and collection policy can create a structured environment that safeguards one of your organization’s most important assets – its accounts receivable. To ensure it achieves your organization’s goals, keep these points in mind when formulating your policy:

  1. The policy must be a living document, routinely updated in response to the changing economy, market conditions, and the competitive environment.

  2. It must be applicable to all of your customers, with limited exceptions.

  3. It must incorporate the needs and help to accomplish the goals of management, finance and sales.