Sample Credit Policy

The credit policy is an essential document for every business, and especially for businesses in the construction
industry. This is a sample credit policy prepared by zlien. Edit it to fit the needs of your business.

Credit Department Mission Statement:

The ___________ credit department’s mission is to facilitate sustainable growth, develop strong customer
relationships, and protect the company’s margins and profits to maximize the value of the company’s accounts
receivables. This is accomplished by minimizing exposure to bad debt and maintaining an acceptable level of risk
by quickly and accurately processing credit applications, reviewing the credit worthiness of new and existing
customers, setting appropriate credit limits and terms, securing extensions of credit, and collecting overdue
accounts.
 A mission statement should be drafted after careful consideration of your company’s unique position in the
market, and the company’s goals as a whole. This is not merely a list of things to accomplish, or goals to
be met, but a description of the vision of the credit department and how the credit department relates to or
supports the mission of the company.
 The mission statement should reflect the company’s mindset, and describe how the credit department will
fit within that viewpoint. If the company has aggressive growth goals, the credit department’s mission
statement will be different than in a company with more modest growth goals.
 A mission statement is also dependent on the internal company structure – for example, if your company
has an internal collections department separate from the credit department, the collection of past due
accounts will clearly not be an aspect of the mission statement.
 While the marketplace and competitors should be considered on a general level in the crafting of a mission
statement, the statement should be internally focused and drafted through the lens of the company’s views
and direction – not be determined by outside pressure.

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Credit Department Goals:
 After a credit department has a solid foundation in a well-crafted mission statement, specific goals must be
set so that the mission can be supported and achieved.
 Goals must be specific and tailored to support the core mission.
 Goals should be measurable – the department must be able to tell whether or not the goals are being/have
been met.
 Goals must be concrete – the place for theory and strategy is the Mission Statement.
 Goals must outline the end result your credit department wants – reaching the wrong goals doesn’t put you
in a better place than not having made the goals at all.
 The goals must be achievable and realistic – everybody wants 0% uncollectable accounts and no bad debt,
but is it realistic?
 Remember the structure and operation of the credit department as a whole will be tailored to achieving these
goals – they are important.

EXAMPLE GOALS:
1. Less than X% of outstanding credit accounts Past Due
2. Less than X accounts unsecured
3. DSO less than X days
4. Less than X% of total accounts closed as uncollectable
5. X% of credit decisions approved or denied within X days
Remember, the goals you set define how the department works, and how it is structured.

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Credit Department Organizational Tiers (Decision Limits):
Just like with every other department in the company, the credit department’s structure must be defined. This
includes both the structure of the department itself, in terms of who has final control (CFO, VP Finance, VP
Sales(?)), as well as setting up a decision making structure.
This may seem like overkill, and, in all honesty, the usefulness and applicability of this section is directly tied to
the size of the company as a whole. If the company is small enough that the business owner makes every credit
decision, creating departmental organizational tiers is probably only theoretically useful. However, it can’t hurt to
have a plan already in place for when the business expands. The ability to seamlessly expand the credit department
in concert with the growing business is a luxury – and having a plan already in place ensures that the growing pains
are minimal. Plus, even if the business never grows to the point that an entirely separate “credit department” is
warranted, it does not follow that the owner will never want to delegate some duties. By following a pre-set plan,
the delegation process can be made clear.
For larger companies, the appropriate departmental structure is essential. Reviewing and making credit
determinations is time consuming. If one person (generally someone towards the top of the chain) ends up with the
responsibility to make every credit decision, that can lead to significant backlogs. If a credit department goal is to
approve or deny extensions of credit within a certain time period, there has to be a staggered decision making chain
to alleviate some of that pressure. Unfortunately, this can easily lead to a credit department being consumed by the
minutiae of an overwrought process.
The organization of the credit department should be easily understood rather than an elaborate matrices that slows
down the process which needs to be streamlined.
Determining which party will exercise final control over the department is crucial, and has a profound effect on the
department. Clearly a credit department that ultimately answers to sales [generally a bad idea, in my opinion] will
behave in a much different manner than a credit department that answers to the CFO.
Finally, for credit departments that perform the duties of managing and implementing lien/notice policy and
collection policy in-house, those specific duties must be outlined.

Credit Dept. Employee No authority

Credit Manager Up to $_____________________

Credit Director Up to $_____________________

CFO Over $_____________________

Obviously, the credit approval chart will look different company by company.

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Credit Evaluation of New Customers:
After the mission has been outlined, the specific goals to accomplish the mission have been drafted, and the
organization of the department has been set, the credit department can actually begin doing work. Credit Evaluation
is central to the function of the credit department. Minimizing credit risk/exposure, protecting margins, and
maximizing profits all stems originally from a good evaluation of the potential customer’s credit. Much of the work
in evaluating the potential credit customer’s credit is accomplished through a thorough credit application.
Standardizing the credit process by having every potential credit customer (every customer can be a credit customer
in some industries) fill out a credit application helps to create a procedure by which the potential risk associated
with extending credit can be mitigated. The first step in managing credit wisely is to make informed decisions about
which parties should qualify, how much credit they should be extended, and the terms thereof. Depending on the
information in the credit application, the payment terms may be modified – and some customers may not qualify
for credit at all. While it may hurt to turn down a sale if the results of the credit application are not sufficient to meet
your policy guidelines, the actual cost of a non-paying client is much higher than the amount of the lost sale.
As well as contacting the credit references listed in a potential customer’s credit application, it can be a good idea
to run a credit report. Trade credit bureaus take information about credit transactions and create business credit
reports. There are a few major business credit bureaus through which you can receive a business credit report,
including:
Dun & Bradstreet
Experian Business
Equifax Business
Credit reports provide a nice snapshot to help make credit decisions, and should be a standard part of a proper credit
application.
Sticking to a written credit evaluation procedure streamlines the business process and takes away time-consuming
decision making. Points to consider in all credit evaluations are as follows:
 Credit investigation on all new customers
 Complete/signed credit application required
 All requests over $______________ directly given to credit manager
 All requests over $______________ directly given to credit director
 Credit report will be pulled for all requests over $_______________

Information to be included on the credit application should include:

 Contact Information
 Credit information: Credit report of the business (and potentially of the owner as well) should be pulled
(obviously dependent on the potential customer). To accomplish this you will need an EIN for the business,
and an SSN from the owner.
 Landlord and/or Mortgage Holder References: If the business doesn’t pay their rent or mortgage on time,
you likely won’t get paid on time, either.
 Bank and/or Trade References: Same thing applies here – A clearer picture of the customers financial picture
appears with every new piece of information.

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  Payment Terms: You may wish to outline your general payment terms in the credit application itself, though
any potential modification to the general payment terms would then need an additional signed document.
You may also wish to keep the two separate. Once a credit decision has been made, the terms can be set and
agreed to in a separate document.
 Personal Guarantee: A personal guarantee added to the credit application gives you an added layer of
security, and potential collection tool. Nobody extends credit to a company that they think won’t pay, but
the personal guarantee of the business owner (or contracting party) can sometimes provide an extra push to
receive payment. Note, however, that this is likely not an option, (nor would you generally want to include
it) when dealing with a larger potential credit customer.

WHEN RE-EVALUATED?
The extension of credit is not a static exercise. The credit department should set a schedule for the re-evaluation of
credit customers. This has two distinct and important purposes: 1) A growing customer may qualify for more credit
and could grow as a customer even more quickly, or 2) A struggling customer, or a customer having payment
problems may need to be downgraded or cut-off entirely.
The frequency at which you reevaluate credit customers depends on the individual business and the specific
customers. Clearly, some credit customers will not need to be reevaluated at all, because of their status and your
company’s credit limits.
A potential schedule could be something as simple as credit customers will be re-evaluated every two years, and/or
after the second late payment.

CREDIT LIMITS BY CHART:

Once the credit worthiness of the customer has been determined on a general scale, the specific credit limit must be
set for each individual customer. Clearly, many factors may be taken into account when determining a credit limit
for each individual customer – some of those, however, will likely be the business credit score and the company
value. From these pieces of information, a potential credit customer may be placed in a matrix of credit worthiness
and the exact credit limit may be fine tuned from there. This type of process can be beneficial for a couple of
reasons: 1) it allows the process to be streamlined and frees up employee time; and 2) pre-set basic credit limits
decrease potential error and minimize risk – if the chart puts a company’s expected credit limit in a certain range
there is little chance that a non-credit-worthy customer will be approved for a disastrous credit limit. This, in turn,
results in more manageable risk. While the chart must necessarily be set according to the specifics of your individual
business and industry, it may look something like the following.

Credit Score Value of Company Credit Limit (Base)

> 75 $5,000,000 or more $ ____________ (Highest)

50 – 75 $5,000,000 or more $ ____________ (High)

25 - 50 $5,000,000 or more $ ____________

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< 25 $5,000,000 or more $ ____________

> 75 $500,000 - $5,000,000 $ ____________ (High)

50 - 75 $500,000 - $5,000,000 $ ____________

25 – 50 $500,000 - $5,000,000 $ ____________

< 25 $500,000 - $5,000,000 $ ____________

> 75 Less than $500,000 $ ____________

50 – 75 Less than $500,000 $ ____________

25 – 50 Less than $500,000 $ ____________

< 25 Less than $500,000 $ ____________ (Low)

> 75 Not Known $ ____________

50 – 75 Not Known $ ____________

25 – 50 Not Known $ ____________ (Low)

< 25 Not Known $ _____________ (Zero)

The credit limits set in the third column are dependent on your business, the industry in which your business
operates, your individual risk aversion, and your sales strategy.

CREDIT TERMS – FACTORS (GENERAL AND SPECIFIC):

General Terms of Credit Extension / Payment Terms

Your credit terms may be outlined in your credit application, or may be determined after a decision has been made
on whether or not to extend credit and/or the amount of credit to be extended. In every case, however, the terms
should be clear, and should be agreed to in writing by the customer.
Whether the terms of credit sales will be standardized, and unchangeable for all credit customers, or whether your
terms can be modified by customer depends on your business. While having one set of credit terms that apply to
any customer and any and all extensions of credit will likely save time, streamline the credit process, allow for
standardization of the collection policy, and potentially cut down risk – those benefits must be weighed against the
realities of the marketplace, and the potential lost sales if terms cannot be modified according to the individual
customer.

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Changing terms based on customer allows a business to dramatically reduce the number of potential credit
customers that are declined. For example, some customers that would otherwise not qualify for credit accounts,
may be extended credit conditioned if the customer grants your company a security interest in some asset of the
customer’s business. Some parties may only be extended credit with a personal guarantee, or if they agree to a joint
check agreement.
Sample Credit Terms:
All Invoices are to be paid within 30 days of the date of the invoice.
Invoices unpaid at the expiration of 30 days from the date of the invoice will begin to accrue late fees at the rate of
1.5% per month, beginning on the 31st day from the date of the invoice.
Claims arising from invoice must be presented to ________________ in writing within 10 days from the date of
the invoice.
Accounts with invoices unpaid after 45 days will be placed on credit hold, and no additional credit will be extended
until the payment of the overdue invoice.
Accounts with two or more overdue invoices will be immediately removed from credit sale consideration for a
period of ____________________, and during that time will only be eligible for non-credit based sales.

Factors to Hold Credit

It’s a pipe dream to assume that every credit customer will always pay on time and that there will never be a reason
to place a credit hold on an account. Numerous factors must be considered in determining when a credit account
must be placed on hold, including but not limited to, late payment, and overtopping the credit limit.
These factors may be placed in the credit terms under which the credit is extended. Just like the other portions of a
credit policy, the exact nature of what will trigger a credit hold on an account will be determined by your business’s
specific situation. Triggers like an account being a certain amount of days overdue, or a certain percentage above
the stated credit limit may be factors that trigger a credit hold.
Sample Credit Hold Factors:
Accounts with invoices unpaid after ___________ days will be placed on credit hold and no additional credit will
be extended until the payment of the overdue invoice.
Accounts where acknowledged credit limit has been exceeded by ___________% will be placed on credit hold and
no additional credit will be extended until the payment of the overdue invoice.

Factors to End Credit

Eventually, you may be forced to cancel a credit account and to stop extending credit to a particular customer. The
same factors that may be considered in determining when to place an account on hold may also be considered,
among others, in determining when to cancel an account. Again, this is a business specific evaluation and no two
companies should approach this exactly the same.

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Security & Risk Mitigation
The factors you need to consider before extending credit all boil down to risk assessment – how likely it is that you
are going to be paid. When you are able to secure the extension of credit, the likelihood of payment skyrockets, and
the extension of credit can be approached in that manner. It’s no secret that a secured creditor is in a much better
position to be paid than a general unsecured creditor.
Extending labor and/or materials on credit opens up the possibility of your business being burdened with bad debt.
Since the actual cost of bad debt is many times greater than the amount of the bad debt itself, it clearly makes good
business sense to insulate your business’s exposure to this type of situation. While it may be difficult, if not
impossible, to completely eradicate bad debt, there are ways to drastically limit your potential exposure and to
maximize profit – all without resorting to an overly restrictive credit policy.
So, what is secured debt, and how should it be assimilated into your company’s credit policy?
Secured debt is a debt backed by a security interest in collateral to reduce risk associated with lending or extensions
of material on credit. What this means is that if a debt is “secured” it is backed by a right in an asset that may be
claimed by the lender in the event of a default by an indebted party. An easy example of this is a home mortgage;
the lender is granted a security interest in the property purchased. If a borrower fails to make the necessary payments
on the home loan, the bank may foreclose on the property to satisfy the debt. The home is collateral for the debt,
and may be sold to satisfy the amount due in the event of a default. A security interest may be either voluntary or
involuntary.
The specific type of security interest will have an effect on the structure of a credit policy crafted to take advantage
of the benefits of securing debt. A voluntary lien is something that must be agreed to by the parties. This agreement
typically occurs as a condition to the extension of credit and therefore should take place prior to the decision on
whether to extend credit or not. An example of voluntary security that can be incorporated into a credit policy is a
UCC lien. An involuntary lien arises through operation of law, whether or not the indebted party consents (provided
the proper steps are taken). An example of this is a mechanics lien.

MECHANICS LIEN POLICY (CONSTRUCTION INDUSTRY ONLY):

Notices – What is the policy/which jobs?

Sending all required preliminary notices, in order to make sure that no potential lien rights are lost, is the most
important part of any Lien & Notice Policy. The problem is that the various rules and regulations all throughout the
country are exceedingly complex and difficult to manage.
Despite the complexities, however, it is imperative that complying with notice requirements is part of a company’s
mechanic’s lien policy. Failure to send a notice when it is required, to whom it is required to be sent, and the manner
in which it must be sent can extinguish any potential lien rights for that project. Each of these has serious
consequence. The ability to place a lien on a property on which you furnished labor and/or materials is dependent
upon following the applicable notice rules. That mean your company’s ability to follow its own mechanics lien
policy is completely dependent on first making sure that notice requirements have been complied with on every
project. Therefore, notice policy is the most important part of the mechanics lien policy.

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Sample Notice Policy:
Notice must be sent on all projects. Notice will be handled via outsourcing to ___________________. To ensure
compliance with state notice requirements, all project information will be submitted to
__________________________ prior to beginning work.
Project will be checked for potential notice documents to be sent:
Prior to beginning work
_____ days after work has begun
Upon completion of work
(Alternatively, notices may be handled in-house. If notices will be handled in-house the notice policy should define
the individual(s) responsible for notice compliance. If notice compliance is done in-house, something similar to the
following should also be included in the notice policy)
Notice must comply with state law. To accomplish the same:
State Requirements checked prior to beginning work
State notice requirements re-checked when work begins
State notice requirements checked finally when work completed
To ensure compliance with state law, a checklist will be created for each project. The checklist will be marked when
each step has been accomplished. The checklist will include:
✓ Date(s) notice(s) must be sent
✓ Party(ies) to whom notice(s) must be sent
✓ Method by which notices must be sent

Sample Notice Checklist:

State: ______________________________________

Notice Required: Y / N? ______

Parties Required to Receive Notice: _______________________________________________________

______ (check when sent)
________________________________________________________
______

________________________________________________________
______

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Deadline to Give Notice: ________________________ Date Notice Sent: ____________________________

Method by Which Notice Must Be Sent: ________________________________________

______
(check when sent via this method)

Enter Tracking Number(s) If Applicable: ________________________________________

________________________________________

________________________________________

A copy of each notice, together with an affidavit of service noting the date and method of sending and the identities
of the parties to whom it was sent, will be kept in the project file.

Liens: What is the policy/which jobs?

After the notice policy has protected lien rights, the lien policy must set forth the specific characteristics of the
projects on which a lien will be filed. Since mechanics liens secure the funds due via the property itself, mechanics
liens are a highly effective tool for getting paid. For that reason, I recommend filing a mechanics lien on every
unpaid project. That being said, there must be some balance and relation between your credit terms and your
mechanics lien policy. If credit terms allow for payment within 30 days, but you are filing mechanics liens after 10
days on every project, that will likely ruffle some feathers. The key, then, is to create credit terms that allow
mechanics liens to be filed within the appropriate time period, without risking the expiration of the lien period and
the extinguishment of lien rights.
Some of the same considerations for the lien policy are the same as with the notice policy, namely whether to
outsource lien compliance or to attempt to stay in-house. Also similarly to the notice portion, the written policy
language will change depending on whether the liens are outsourced or compliance is kept in-house.

Sample Lien Policy:

Projects will be liened provided the following conditions are met:
1. Amount due is greater than $ __________
2. Invoice is more than _________ days old
3. State specific notice requirements have been met
Liens will be outsourced to _______________________.

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(Alternatively, liens may be handled in-house. If liens will be handled in-house the lien policy should define the
individual(s) responsible for lien compliance. If lien compliance is done in-house, something similar to the
following should also be included in the lien policy)
Liens must comply with state law. To ensure compliance with state law, a checklist will be created for each project.
The checklist will be marked when each step has been accomplished. The checklist will include:
✓ Date by which lien must be filed
✓ Location where lien must be filed
✓ Statutory language and content that must be included
✓ Whether notice of lien filing must be provided to any party
o If so, to whom
o By when
o By what method
Liens must be compliant with recording requirements by county including margins and filing fees.

Sample Lien Checklist:

State:
___________________________________________________________________________________________
__
Location & Office in which to File Lien:
______________________________________________________________
Margin Requirements:
_____________________________________________________________________________
Filing
Fee:________________________________________________________________________________________
_

Statutory Language & Content Compliant: Y/N

Owner Required to Receive Notice: Y/N
(check when sent)

Deadline to Give Notice of Lien Filing:

_______________________________________________________________
Date Notice of Lien Filing Sent:
_____________________________________________________________________

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Method by Which Notice Must Be Sent: ______________________________________________
______
(check when sent via this method)
Enter Tracking Number(s) (If
Applicable):_____________________________________________________________
Enter Contact Information for Process Server (If Applicable): __________________________________________

OTHER SECURITY (UCC LIENS):

For businesses in industries other than construction, security can be gained through a security agreement and the
filing of a UCC-1 (Uniform Commercial Code) Financing Statement. A security agreement may be attached to the
credit application if UCC liens are going to be a routine part of your business’s credit policy. However it’s more
likely that a UCC security interests may come into play only after a potential credit determination has been made
in order to secure that extension of credit.
Security interests in personal property (as opposed to real property) are governed by Article 9 of the UCC and are
generally granted (and created) by a written security agreement, and perfected by filing.
Security Agreements are contracts outlining the relationship between the creditor and the debtor in a secured
transaction, governing the rights of each party with respect to the secured property. In order to have a valid security
interest, the creditor must have a security agreement with the debtor that meets certain specific requirements, namely
it must be signed, it must clearly state that a security interest is intended, and it must contain a sufficient description
of the collateral subject to the security interest.
A security agreement does not need to be an overly complicated legal document in order to be effective, it simply
must contain the 3 required factors: A letter or other basic document, such as the one provided above as exhibit A
to the Credit Application will be sufficient provided the additional 3 requirements are met. It is also a good idea to
include that the creditor is allowed to file a UCC financing statement because this clause can allow the creditor to
file the financing statement to perfect the lien without getting an additional signature form the debtor.
The information that must be included in the security agreement must be specific to satisfy the requirements. The
name of the debtor (and the owner of the property if those are different) must be exactly correct – an incorrect name
can cause the security agreement to be ruled invalid, even if seems a simple mistake.
The description of the collateral must also be specific. Serial numbers, VINs, etc., are clearly sufficient for security
agreements regarding that type of property. Other types of property require different levels of description, for
example, a current inventory list will likely be sufficient for a security interest in inventory, and the same likely
goes for fixtures. Finally, the security agreement must specifically state that a security interest is intended by this
document thus including in the agreement the statement that a “security interest” (specifically) is intended.
After a security agreement has been entered into, a security interest under the UCC is perfected by filing a “financing
statement.” Generally, the financing statement is filed in the state of the debtor’s incorporation – not the state in
which the property is located. A sample financing statement form Louisiana is provided below.

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Determining when a UCC security interest should be sought to secure credit extended is a business-by-business
decision. Factors to consider may include the credit score of the business, the value of the business, the value of the
credit sought, and the existence or non-existence of other forms of security.

Sample UCC Lien Policy:

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Security Agreements will be required for all extensions of credit meeting the following criteria:
1. Business has a credit score of ___________ or lower, and/or
2. Business has a value of _____________ or less,
AND

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 3. Extension of credit sought is ________________ or higher,
AND
4. No more than one of the following is available: personal guarantee, mechanics lien, joint-check
agreement.
OR
1. Security Agreement is to be built into the credit application/credit agreement. All extensions of credit
will be subject to a security interest in the accounts receivable and proceeds of the debtor.
2. Security interests in specific individually described property will be obtained in cases where the
following criteria are met:
1. Business has a credit score of ___________ or lower, and/or
2. Business has a value of _____________ or less,
AND
3. Extension of credit sought is ________________ or higher

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Collections Policy:
At some point, a customer to whom credit has been extended will not pay on time. With all of the security and other
policies and procedures in place to get you paid, the penultimate step is to have a collections policy. There are
numerous steps and factors to consider when crafting a collections policy, but the first step is the same as each other
aspect of credit policy as a whole – it should be written down, and consistently applied.
Collection policy defined: A collection policy is the set of procedures a company uses to ensure payment of overdue
accounts receivables. Generally, a collection policy systemizes the steps taken to recover amounts due prior to
litigation. This includes when a customer should be contacted, how they should be contacted, how disputes are
resolved, when internal or external “collectors” are used to step-up collection efforts, and ultimately when and
whether to turn the account over to litigation or write-off the debt.
Just like a credit policy as a whole, a collection policy is not an off-the-shelf product. Each individual business will
likely want to treat the collection policy in a different way – some are much quicker to send a sternly worded letter
or firm phone call upon late payment, and some will let the account simmer for a short period of time. As with many
things in life and business, a moderate approach that balances the reality of the market with the need to get paid
according to the terms of the credit extended is likely the best solution. Keep in mind though, that running a “tight
ship” can let your customer know from the beginning of the relationship that you are on top of your credit
department, are serious about getting paid, and that follow-up for late payment is part of the process. This can lead
to less work later on.

IN-HOUSE OR OUTSOURCE:
The first part of any collection policy is generally in-house. The question is whether or not the collection policy
should keep the whole process in-house, or if it should be eventually be outsourced, and when that point comes. Of
course things like making a nice phone call before the payment is due in an attempt to ensure prompt payment, and
even a stern letter after the debt becomes due are things that are easily handled in-house. There are certain things
that an outside collection company can do, however, that would strain the time or resources of many businesses.
Outside debt collection agencies can be beneficial for several reasons, including experience specifically in debt-
collection, notifying the debtor that the company has escalated the debt collection process, spending time and
resources to continually contact the debtor with letters or phone calls and responding to and locking down promises
to pay, reporting the debtor to credit bureaus, and more. Clearly this must be balanced with the cost associated to
use an outside collection agency compared to attempting to keep the process completely in-house.

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SAMPLE COLLECTIONS POLICY:

1. ________ days prior to account being due, send an email and make a phone call to the customer
thanking them for their attention and business, and reminding them that they have an upcoming payment
due date.
2. ________ days after due date, make a phone call reminding the customer of the due date, and the balance
due.
3. If the customer is local, consider stopping by to talk and discuss the account at this time.
4. ________ days after the phone call in (2), send a more forceful letter reminding the customer of the
overdue balance, the terms under which the credit was extended, and the service charges that are
accruing.
5. ________ days after the letter in (4), send a letter notifying the customer that the account has been
placed on hold, no further credit will be extended, and, if the outstanding balance is greater than $
____________, that the matter has been turned over to an outside collections agency – turn the account
over to a collections agency.
6. ________ after the account has been turned over to an outside collections agency, a determination will
be made whether to 1) write off the debt; or 2) move from collections to litigation. At this point, send a
letter to the client notifying them that their credit account has been cancelled.
You must determine whether the debt is high enough to send to your legal department, or outside counsel then
whether or not to initiate litigation and collect the past-due amount. This can be done via the Litigation Policy.

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Litigation Policy:
The final step in a business’s credit policy is the litigation policy. That is, when do you call in the lawyers, and
which accounts are worth taking to court. Clearly, commencing litigation is going to strain the relationship between
your business and your customer, so this is likely not an option if you wish to continue a business relationship.
Although, if it has gotten to the point where the debt is past-due for a long enough period of time, that you are
considering litigation, that ship has likely already sailed. Also, litigation is expensive. You want to be sure the debt
is worth it before going down that road.
Another factor to consider, and one that may play a part in determining the value of outstanding debt worth
litigating, is what security you have in place to ensure payment. While the security of mechanics liens, UCC liens,
personal guarantees, joint-check agreements, etc. all provide incentive for the customer to pay prior to getting to
this point, they also all work to make the debt less risky in a litigation context. It is much easier, and therefore
usually cheaper, to recover a secured debt than it is to recover an unsecured debt through the litigation process.

SAMPLE LITIGATION POLICY:

1. If the outstanding debt is greater than $ _________________, always turn over to litigation when the
debt becomes _____________ days past due. (Note that when secured by a mechanics lien, the date by
which legal proceedings must be initiated before the lien expires is set by statute).
2. If the outstanding debt is between $ __________________, and $ ________________, send to litigation
if the debt is secured by a mechanics lien, a UCC lien, a personal guarantee, a joint-check agreement,
or any other security.
3. If the outstanding debt is between $ __________________, and $ ________________, send to litigation
if the debt is secured by a mechanics lien, or a UCC lien only.
4. If the debt is $ __________________, or below, write-off debt and release the client.

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