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Basic Outline for Developing a Credit Policy

Create an Effective Credit Policy For Your Customers Using These Best Practices

Per, a Credit Policy is a set of principles that a financial organization or business uses in deciding who it will loan money to or give credit to.

  • 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 a mission statement for your department. This will differ from your company’s corporate mission statement, but it should be in full alignment with it. You will want to get input from upper-level management and the sales department. It’s important that your sales team understands how the credit department will work to help ensure their success within the corporate guidelines.

Credit policies should reflect corporate goals, 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.

Credit Department Mission Statement (sample text):

  • 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 non-collectable accounts and order holds.

Section 2: Credit Department Goals

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

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

Sample Credit Department goals:

  • 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 Credit Department Roles & Descriptions:

  • CFO: Ultimate authority for Credit Department; oversees the entire team and works with managers on recruitment, hiring and overall staff management policies.
  • 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 $250,000.
  • 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 the 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.

As with your goals, the procedures should be updated periodically to take advantage of best practices, technology, or anything new that can be implemented to 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 Line Approval
$250.00 Yes Yes No Prepaid then Net 30 $250.00 Analyst
$500.00 – $2500.00 Yes Yes Basic Report Due on Receipt then Net 30 $500.00 – $2500.00 Credit Manager
$2500.00 + Yes w/ signed personal guarantee & financials Yes Full Report 50% on 1st order then Net 30 ??? Credit Manager


Sample Credit Application Text:

We require a credit application to be fully completed by every customer and signed by an authorized officer of the company. 

For information on why a signed credit application is essential and what it should contain, read Credit Extensions are Loans: Insist on a Completed Credit Application

2. 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.

3. Terms and Conditions of Sale

Your terms and conditions of sale protect your rights as a seller. They should be included in 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. Ways to do this include prepayment on the first order, security (UCC9), 50% down payment, or approving a smaller credit limit than initially requested with a plan to review and possibly increase after a predetermined period of time or a certain value of paid invoices. For international customers, consider using Documents Against Payment (D/P), Documents Against Acceptance (D/A) or Letters of Credit (L/C) to provide a greater level of security than an open account. See D/P, D/A and Their Use in International Sales Transactions for more details.

4. Invoicing

Sample 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, and
  • 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 Collection Manager for appropriate handling. For help establishing a report, refer to Corporate Institute’s (CFI) Aging Report Template.

5. Collections

Even with your best efforts to carefully and consistently manage your company’s receivables, there will be some accounts that aren’t paid on time. Having a plan for actively handling past due accounts can increase the likelihood of collecting on them. We recommend contacting customers before the invoice actually becomes due, at least for larger accounts.

Sample Collections Matrix (Net 30 terms)

From Oldest
Invoice Date
Portfolio A
$5000.00 +
Portfolio B
$2500.00 – $5000.00
Portfolio C
$500.00 – $2500.00
Portfolio D
< $500
0 – 20
Current Current Current Current
20 – 30
Current – Follow Up Call Current – Follow Up Call Current – Follow Up on Call
& Email
37 – 40
In-House Follow Up Call In-House Follow Up Call Follow Up Collection Letter
& Email
Follow Up Collection Letter
& Email
45 – 50
In-House Collection Call #1 In-House Collection Call #1 In-House Collection Call #1 In-House Collection Call #1
55 – 60
Escalation to Collections Manager;
Collection Call; Credit Hold
In-House Collection Call #2 In-House Collection Call #2 In-House Collection Call #2
65 – 70
Review by Credit Manager;
Final Demand Call
Escalation to Credit Manager;
Final Demand Call;
Credit Hold
In-House Final Demand Call;
Credit Hold
Final Demand Letter;
Credit Hold
75 – 90
To 3rd Party Agency Review by Credit Manager;
To Agency
To 3rd Party Agency To 3rd Party 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 as an additional resource.
  • 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.
  • Subsequent contacts should request immediate payment or, if the customer instigates, discuss payment plans. Review Six Tips for Making Collection Calls that Get Results for more details.
  • 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 Credit Extensions are Loans for more info.

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

  • Disputes and Deductions: Include how to respond, and who has the authority to approve.
  • Credit Holds: Include details on when to place an account on credit hold, and who authorizes credit holds.
  • Payment Plans: State who can propose and approve payment restructuring plans.
  • Write-offs: Document when to write off an account to bad debt.
  • 3rd-Party Collections: List both when and who authorizes the forwarding of an account to a 3rd-party collection agency.
  • Lawsuits: Include recommendations for how to determine whether or not 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.

Check out these other credit management articles on our website.

To learn more about our accounts receivable management services, contact us today!