Top Service News
What is a Credit Policy?
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A credit policy provides a framework for managing credit related processes, sets clear expectations and promotes efficient communication within a construction business.
By implementing and adhering to a credit policy, businesses can mitigate financial risks, improve cash flow and support sustainable growth.
A credit policy can support construction businesses in several ways:
Streamlining credit processes:
A credit policy provides clear guidelines and procedures for extending credit to customers. It helps standardise the credit evaluation process, ensuring that consistent criteria is used to assess creditworthiness. This can prevent inconsistencies and biases in credit decisions and improve the efficiency of credit evaluations.
Setting credit limits and payment terms:
A credit policy outlines the factors considered when setting credit limits for customers and determining payment terms. By establishing a systematic approach, the policy helps construction businesses avoid overextending credit to risky customers and ensures that payment terms are appropriate for the industry’s payment patterns. In turn, reducing the risk of late or non-payments and improving cash flow.
Managing invoicing and collections:
A credit policy can provide guidelines for the invoicing process which emphasises the importance of accurate and timely invoicing. It helps invoicing teams understand how their actions affect payment timelines and encourages them to prioritise prompt and accurate invoicing. Additionally, the policy can outline the steps to be taken in case of unpaid invoices, providing a framework for effective credit collection activities.
Enhancing communication and collaboration:
By clearly communicating the credit policy across the organisation, all teams involved in the credit process including business development, invoicing, branch managers, and credit management can understand their roles and responsibilities. This promotes collaboration and a shared understanding of the importance of both sales and cash flow. It reduces friction between teams and fosters a more integrated approach to achieving business goals.
Mitigating risks and improving cash flow:
A well-designed credit policy helps identify potential credit risks and outlines strategies to mitigate them. By minimising the likelihood of non-payment or late payment, construction businesses can improve their cash flow. The policy can also address how to handle invoice disputes promptly, reducing delays in resolving payment issues and ensuring a steady cash flow.
Sharing Your Credit Policy
Sharing a credit policy with customers can contribute to improving and strengthening business relationships.
Transparency and trust:
By sharing your credit policy with customers, you demonstrate transparency and openness in your business practices. This helps build trust and credibility with your customers, as they have a clear understanding of your credit evaluation criteria, payment terms, and dispute resolution processes. It shows that you have well-defined procedures in place and operate in a fair and consistent manner.
Clear expectations: Sharing your credit policy at the beginning of the relationship sets clear expectations for both parties. Customers are aware of what is expected of them in terms of payment timelines, invoice accuracy, and compliance with your credit terms. This can help prevent misunderstandings and disputes in the future.
Improved communication: The credit policy can serve as a communication tool to address any concerns or questions customers may have regarding credit limits, payment terms, or invoice disputes. By proactively sharing this information, you provide an opportunity for dialogue and clarification, fostering better communication and understanding between your business and its customers.
Collaboration and problem-solving: When customers understand the criteria for increasing credit limits, they can actively work towards meeting those requirements. This promotes collaboration and engagement between your business and its customers, as they strive to build a stronger relationship based on mutual trust and financial stability. It creates an environment where both parties work together to find solutions and overcome potential credit-related challenges.
Competitive advantage: In a competitive construction market, having clear and consistent back-office practices can differentiate your business from competitors. By demonstrating a well-defined credit policy and efficient credit management processes, you showcase your professionalism and reliability. This can contribute to winning contracts based not only on price but also on the strength of your business operations and the ease of doing business with you.
Remember to consider the appropriateness of sharing sensitive financial information within your credit policy. While it can be advantageous to communicate your credit policy’s general principles and guidelines, you may need to exercise discretion when sharing specific details related to credit limits, payment terms, or other proprietary information.
Creating a Credit Policy
Creating a credit policy requires careful consideration of the business goals, internal challenges, industry factors, and legal requirements. Here are some steps to help you create an effective credit policy:
Define the business objective: Clearly identify the purpose of the credit policy. Determine why you are extending credit facilities to customers, whether it’s to achieve sustainable growth, remain competitive, or minimize bad debt. This objective will guide the development of your policy.
Involve key stakeholders: Engage relevant departments and individuals impacted by credit facilities and unpaid invoices within the business. Seek input from finance, sales, credit management, and legal teams to understand their challenges and ensure their perspectives are considered in the policy. You may even want to discuss and get ideas from 3rd party providers who support your business’s credit management function. For example, your credit information provider or DCA (Debt Collection Agency)
Consider internal and external factors: Assess your business size, cash flow, and forecasting capabilities. Take into account industry trends and economic or political factors that may impact credit decisions. These considerations will shape the specific guidelines and criteria in your policy.
Review terms and conditions: Evaluate your existing terms and conditions, including payment terms, interest clauses, invoice query resolution, and retention of title clauses. Align these elements with your credit policy to ensure consistency and clarity in customer agreements.
Determine department responsibilities: Clearly define the roles and responsibilities of each department involved in credit-related activities. Identify which teams are responsible for credit evaluations, invoicing, collections, and dispute resolution. This promotes accountability and efficient collaboration.
The balance between risk and customer relationships:
Find the right balance between a restrictive policy that reduces bad debt but may hinder customer acquisition, and a loose policy that increases cash flow risks. Consider your risk tolerance and the impact on customer relationships when setting credit limits and payment terms.
Assess credit tools and resources:
Evaluate the tools and resources needed to achieve the objectives of your credit policy. This may include industry-specific credit information services and collections agencies that align with your business culture and customer relationship goals.
Regular review and evaluation: Once the credit policy is implemented, establish a process for regular review and evaluation. Monitor its effectiveness, identify areas for improvement, and make necessary adjustments to ensure the policy continues to support your business objectives.
Remember, a credit policy is not a one-time creation. It should evolve with your business and adapt to changing circumstances. Regularly assess its effectiveness, update procedures as needed, and stay informed about industry best practices to maintain a strong credit management framework.
Emma Reilly MCICM, CEO and credit expert at Top Service Ltd & her team are always more than happy to discuss credit management practices and tools.
T: 01527 518800