Credit Policy Fundamentals

What a credit policy contains

At minimum: standard payment terms (e.g., net 15), credit limit by customer tier, deposit/retainer requirements, late-payment fees, the dunning sequence (when collection emails and calls happen), and the threshold at which an account is referred to collections or written off.

Larger businesses add a credit application form (collected before extending terms), references requirements, personal-guarantee thresholds, and named approvers for exceptions. The policy is reviewed annually and signed by the owner or CFO.

Why owners resist writing one

Most service businesses extend credit informally — invoice on net 30, hope for the best, escalate only when desperate. The hidden cost is enormous: studies of small-business credit losses show 1-3% of revenue lost to bad debt annually, the bulk traceable to clients who would have failed a basic credit check.

A written policy also resolves the awkward 'why are you the only customer I'm chasing' problem. The answer becomes 'this is our policy for everyone' — which is far easier to enforce than a personal request.

Putting a policy in writing

A written credit policy answers four questions: who is approved to extend credit, what underwriting is required, what terms are standard, and what the escalation path is when terms slip. Without a written policy, sales reps inadvertently set credit terms during negotiations, large balances accumulate with customers no one underwrote, and collections becomes a series of one-off arguments instead of a process.

Start with a default — typically net-30 with a credit limit of 1-2 months of expected revenue from the customer — and require formal exceptions for anything more generous. The exception process should require finance approval and document the rationale; this creates an audit trail and prevents 'we always make exceptions for big customers' becoming the de facto policy.

Review credit limits annually for active customers and immediately when a customer's payment behavior changes. A customer who used to pay in 25 days and now pays in 50 days is signaling distress, and the right time to tighten terms or stop shipping is before the balance balloons, not after.

The credit policy should be reviewed annually by the finance lead and acknowledged by everyone in sales who can quote terms. New sales hires should get a copy during onboarding alongside the playbook and the price list. Without that institutional discipline, the policy drifts back to whatever the most recent customer asked for.