CREDIT POLICY

Posted by:  CCP Zipporah Gikonyo   On   July 09, 2021

 



What is a credit Policy??



A credit policy is a document containing a set of decisions to be considered when extending goods and services on credit. It tries to answer the folowing questions;




  • Who qualifies for credit?

  • Terms of credit to be considered

  • How to collect from customers

  • Recovery steps to be taken in case of default.



A sound credit Policy must be formulated to ensure all benefits of extending goods and services on credit are reaped like, increased sales and profits,the policy protects the business from possible defaults.



Factors to Consider When Preparing a Credit Policy




  • Business Strategic goals

  • competition terms

  • Financial needs

  • profit margins

  • Credit objective

  • Risk tolerance

  • Management sensitivity to credit risk and loss

  • Nature of product or service

  • size and nature of the business



Types of Policies




  1. Liberal Credit Policy- It is a generous type of a policy that allows favourable credit terms to customers. It is is necessitated by need for, market penetration, increased market share, stock with short expiry daye, stiff competition, high profit margin, low demand and threatened market position by competition.

  2. Conservative Credit Policy- It is a restrictive policy that is not generous to borrowers and is mainly adopted by businesses that face no or little competition. Condition that may influence this policy are low net profit, high demand for products and services, monopolistic position, established market share, tailor made products, financial position of teh company and lengthy production processes.



Contents of the Credit Policy




  • Credit mission for the business

  • payment terms and condition of credit sales

  • Customer credit risk assessment and appraisal

  • Collection methods to be used.

  • Performance measurement

  • Recovery procedure of overdue accounts, appointment of third part collectors and legal recovery

  • Staff responsibility

  • Approval by the board.



Adopting a credit policy in the business will ensure all customers are treated equally, will breed consistency in the business, will potray a positive business attitude towards customers, eliminates special terms to customers who are not not credit worthy and ensures business continuity.



In conclusion a credit policy is a must have for every type of a business.



If you would like a training on credit policy or a policy prepared for your business, reach out to us through info@creditmanagement.co.ke.



To undertake a course in credit management visit https://www.creditmanagement.co.ke/Tumaini/courses.html



 



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