Protecting Your Business With Credit Policies And Procedures
- Arnold Shields
- Sep 10, 2010
- 3 min read
Updated: Jun 18
If you were in the business of lending money, would you hand it over without a signed repayment contract? It’s a rhetorical question, of course, but many businesses do exactly this by offering credit terms without proper documentation or policies in place.
Offering credit effectively puts you in the business of money lending. And without a clear and enforceable credit policy, you're gambling with your cash flow.
Why Sound Credit Policies Matter
Sales might be the lifeblood of your business, but unpaid invoices can stop your cash flow dead in its tracks. Businesses often focus so heavily on securing the sale that they overlook whether the customer is actually capable, or willing, to pay on time.
Establishing a robust credit policy ensures your business stays financially healthy while still accommodating customer needs.
Step One: Start with a Credit Application
A credit application is your first line of defence. It formalises the credit arrangement and should include:
Clear payment terms
Penalties for late payments
Permission to seek credit references or reports
A personal guarantee if dealing with sole traders or small entities
It’s also wise to have a relationship with a debt collection agency lined up before issues arise, so you’re not scrambling when overdue accounts start mounting.
Do Your Homework Before Granting Credit
Once a customer submits a credit application, follow up on their references and purchase a credit report if necessary. Warning signs, like outstanding judgments or consistently slow payments, are reasons to reconsider or request up-front deposits.
Set minimum standards for who qualifies for credit. For example:
Have they been in business for a minimum number of years?
Do they operate in a high-risk industry?
Do they have a history of litigation or unpaid debts?
If your competitors are offering tighter or looser terms, use that as a benchmark, but always err on the side of caution.
Make It Easy to Pay You
Believe it or not, many invoices go unpaid simply because they were sent to the wrong person or address. Always confirm invoice delivery details and offer a variety of payment methods: EFT, BPAY, credit card, PayPal and so on.
Also, invoice promptly. A delay in billing signals to your customer that payment isn’t urgent, and they may treat it as such.
Be Proactive with Follow-Up
The moment a payment is overdue, follow up. Contact the client to:
Confirm they’ve received the invoice
Ask for the reason behind the delay
Request a firm commitment date for payment
Maintain regular contact until the debt is resolved. Businesses that follow up consistently are statistically more likely to be paid than those that don’t.
Know When to Escalate
If repeated follow-ups are ignored, escalate the matter to a collection agency. These agencies usually work on a commission basis, taking a percentage of the recovered debt. They can also advise you on whether legal action is appropriate if initial efforts fail.
Final Thoughts
When you offer credit, you're not just selling goods or services—you’re extending a financial loan. Without solid credit policies and procedures, your business is at risk of mounting debt, poor cash flow, and unnecessary stress.
Take the time to develop a credit policy that suits your business and enforce it consistently. It’s one of the smartest risk management tools at your disposal.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
