Creating a Credit Policy that Helps You Get Paid

By Candace Pavliscak, Chief Credit Officer & Senior Vice President, Hennessey Capital

Everyone thinks of the banking/finance industry when they hear the term “credit policy” particularly with the prevalent coverage in the media as of late. I have even seen “lending policy” and “credit policy’ used synonymously in some articles but I believe what they each represent is very different. While it is true that all financial institutions have a credit policy that drives their lending practices (some better than others as we have seen), every business should have some form of credit policy.

Why should your company have a credit policy? Think about it, as a goods or service provider you are extending credit to every customer that doesn’t pay you cash on the spot for your work. You should have some idea of how much credit you are willing to extend and to whom. The basics of a credit policy can be summarized as follows:

Know your customer. How well do you truly know your clients? What reputation do they have around town or among industry peers? What are their typical payment habits? Is there an end user beyond your customer that will affect payment to you? If so, how strong is that company? It is a recommended practice to request credit references and utilize public data to analyze your customers before you begin a relationship.

Know yourself. You need to be able to determine how much risk you are willing to take? This boils down to how much are you willing to lose. As we see with personal investors, some are willing to take big risks for the possibility of larger returns and others prefer smaller returns and limited risk. Find the balance that suits your business. Remember though that no one collects 100% from all its customers 100% of the time. Also be aware of how many “good sales” you have to generate to make up for the one “bad sale.”

Have a process and make sure it is communicated to all employees. This principle encompasses everything from your sales process (do your sales people understand your risk tolerance?, will they get the reference information you want?) to your invoicing process (what can you bill for?, when can you bill it?, where do you send the bill? and what approval is needed for your customer to pay the bill?) and finally to your collections process (do you have the right AP contacts for your customer?, are you making timely follow up inquiries?, and do you have any leverage if payment issues arise?)

Having clear expectations with your customer and your employees helps to set the tone and build relationships for your company to succeed.

Creating a sound credit policy is critical to avoiding confusion with customers and keeping your company’s financial house in order. For additional resources/samples of effective credit policies, see Inc’s Finance Guide: How to Create a Smart Credit Policy

Key Steps To Improving Your Collections Process: Podcast Episode 6

The most important part of the sales cycle is getting paid.If your company is not being paid for the product or service you are providing, you’re losing money on the work.

In this episode of Capital Conversations we take a look at how to make the collections process easier, how to overcome obstacles, and how to anticipate collection issues and recognize red flags to avoid problems in the first place.

Join us for a  chat with Candi Pavliscak, the Chief Credit Officer here at Hennessey Capital, to get the inside track on what you need to do as a business to ensure full and timely payment..

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