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Credit
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Credit Standard
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01 DEFINITION
0 IMPORTANCE OF CREDIT POLICY

02 TYPES OF CREDIT POLICY 5

06 FORMULATING A CREDIT POLICY
03 ASPECTS OF CREDIT POLICY

0 ADVANTAGES OF CREDIT POLICY

0 COMPONENTS OF CREDIT POLICY
7
4
 DEFINITION
What is Credit
Policy?
A credit policy is a set of
guidelines that sets credit
and payment terms for
customers and establishes
a clear course of action
for late payments.
A good policy will generally do
four things:
1.Determine which customers are extended
credit and billed
2.Set the payment terms for parties to
whom credit is extended
3.Define the limits to be set on outstanding
credit accounts
4.Outline the steps or procedures used to
deal with delinquent accounts
 TYPES OF CREDIT POLICY

TYPES O F CREDIT POLICY

LOOSE FLE X IBLE TIGHT NO
C RE D IT C R E D IT C RE D IT C RE D IT
Represents a Generally means less This is an unwillingness
Represents a greater willingness to extend willingness to extend to extend credit, as a
willingness to extend credit depending on credit to support company is highly risk-
credit to grow the circumstances. It’s revenue growth. This is averse or has no
business; a strategy to generally a neutral a strategy of restraint business case to
take on higher credit strategy that does not often implemented to support the
risk and reap the aggressively grow or limit credit losses cost/benefit of
rewards. restrict access to credit and/or replenish extending credit.
for clients. capital.
ASPECTS OF CREDIT POLICY

1.CREDIT T E R M 3. C O L L E C T I O N
- stipulations under which the firm POLIC Y
sells on credit to its customers.
-It should aim at accelerating collection
Credit period - time duration for which credit
from slow payers and be reducing bad
is extended to the customers.
Cash discount - rate of discount and the debts losses. The collection program
period for which the discount is offered. should consist of the following:
Monitoring the state of receivable
Dispatch of letters to the customers
2. C R ED I T STANDARDS whose due date is nearing.
-basic criteria for extension of Telegraphic and telephonic advice
credit to customers. to the customers around the due
Liberal Credit Standards - push up sales by attracting more customers
date.
but this increases the incidence of bad debts loss, investment in The threat of legal action to
receivables and cost of collection.
Stiff Credit Standards - depress sales but also reduce the incidence of overdue accounts.
bad debt loss, investment in receivables and collection costs.
C O M P O N E N T S O F CRED IT POLICY

C O M P O N E N T S O F CREDIT POLICY

Credit eligibility Credit terms Clear Collection

standards documentation

Research new clients are terms that indicate Requirements for Your policy guidelines
by purchasing when payment is due purchase orders, should explain in
for sales that are made contracts, credit clear language the
business credit
on credit, possible applications, sales
reports or contacting steps you’ll take if an
discounts, and any agreements and
credit departments in account becomes
applicable interest or invoices should all be
your industry. delinquent.
late payment fees. documented and made
clear to the client.
I MPORTANC E O F CREDIT POLICY

IMPORTANCE OF CREDIT
POLICY
"A credit policy helps you determine
which clients or customers are
eligible for credit from your company
and outlines the steps you’ll take to
collect unpaid debts."
FO R M U L AT I N G A C REDIT POLICY
0 UNDERSTAND THE OBJECTIVES ESTABLISHED FOR THE CREDIT DEPARTMENT
1
RECOGNIZES THE IMPORTANCE OF CONSISTENCY IN THE DECISION
0 MAKING PROCESS
2
IT MUST TAKE INTO ACCOUNT THE RESOURCES AND RESOURCE CONSTRAINTS
0 FACING THE CREDIT DEPARTMENT
3
IT SHOULD MAKE ALLOWANCES FOR SCENARIOS IN WHICH FLEXIBILITY
0 IN CREDIT DECISION MAKING WOULD BE
4 DESIRABLE
ADVANTAGES
AD VAN TAG E S
O F CREDIT
POLICY
It sets out clearly how you are
going to get new customers, what
information you need, how much
credit you are prepared to offer
in time and value.
It shows customers you care about
them enough to explain from the
start exactly how you do business
It improves internal communications when everyone
knows exactly what they have to do and how to do it.
It clarifies the work for credit and sales to work
together in a positive environment to grow the
business.
It sets out the steps that need to be taken to mitigate
risk and minimise losses to maximise profits.
It sets out the authority levels, so the work is
delegated to the appropriate level in the organisation,
so senior manager get to review significant risk and
the smaller values are handled at ground level.
It should include the commercial cycle from getting a
lead to putting the money in the bank.
It sets out your provisioning policy, to guard against
any nasty surprises.
It must contain a "Right First Time" section detailing
not only the steps but the order the steps should be
taken, to ensure the smooth running of all your
processes.
Test I: Identification

1. It is a set of guidelines that sets credit and payment terms for customers and establishes a clear course of action for
late payments.
2. Are terms that indicate when payment is due for sales that are made on credit, possible discounts, and any
applicable interest or late payment fees.
3. A rate of discount and the period for which the discount is offered.
4.Generally means less willingness to extend credit to support revenue growth. This is a strategy of restraint often
implemented to limit credit losses and/or replenish capital.
5.The basic criteria for extension of credit to customers.

Test 2: Enumeration
1-4. Enumerate the Four types of Credit Policy
Test I: Identification

1. It is a set of guidelines that sets credit and payment terms for customers and establishes a clear course of action
for late payments. - CREDIT POLICY
2. Are terms that indicate when payment is due for sales that are made on credit, possible discounts, and any
applicable interest or late payment fees. - CREDIT TERMS
3. A rate of discount and the period for which the discount is offered. - CASH DISCOUNT
4. Generally means less willingness to extend credit to support revenue growth. This is a strategy of restraint often
implemented to limit credit losses and/or replenish capital. - TIGHT CREDIT
5. The basic criteria for extension of credit to customers. - CREDIT STANDARDS

Test 2: Enumeration
1-4. Enumerate the Four types of Credit Policy
-LOOSE CREDIT
-FLEXIBLE CREDIT
-TIGHT CREDIT
-NO CREDIT
the
end.