How to craft a credit policy & protect from losses

Posted by Team Waddle on 27-Jan-2016 14:22:41

You’re a lender and you didn’t even know it; offering trade credit means you need to have a credit policy from the get-go.

We’re pretty certain you’re either contemplating offering credit terms or have been offering them already, turning a blind eye to knowing exactly who you’re dealing with.

[inlinetweet prefix="" tweeter="" suffix="@getwaddle"]The reality is, offering a credit term is giving your customer an interest-free loan until payment is received[/inlinetweet].

When your customer applies for credit you need to know if that person or company is good for the bill right? So why aren’t you checking their credit or putting in place a formal agreement that at least outlines some basic terms.

What does it mean for your business?

Granting credit has cost associated. There is the expense of working capital not received upfront and using your own money or borrowed money during these gaps or the administrative costs of creating statements and collecting.

You’re saying “but that’s the cost of doing business” and we agree that once you get to a certain size or start dealing with larger buyers you simply need to offer credit in order to get customers to buy more from you. The most important thing is knowing who your offering credit to and setting a benchmark of how you do business with them from the start to avoid any nasty surprises or negative feelings if you decide to implement a policy in the future.

The last thing to point out to customers is detailing how you deal with overdue or non-payments. Having this in your policy helps to avoid any arguments of how you’ll deal with bad debts and helps to show that you have a professional well thought out process on collecting. This can also stop those annoying stressful conversations that happen when you have a close relationship with a customer that can’t pay and you can offer them a payment plan or delayed payment relief that once again sets a nice precedence of professionalism when things get tough. 

What does a typical credit policy include?


  • Credit limits. You'll establish dollar figures for the amount of credit you're willing to extend and define the parameters or circumstances.
  • Credit terms. If you agree to bill a customer, you need to decide when the payment will be due. Your terms may also include early-payment discounts and late-payment penalties.
  • Deposits. You may require customers to pay a portion of the amount due in advance.
  • Customer information. This section should outline what you want to know about a customer before making a credit decision. Typical points include years in business, length of time at present location, financial data, credit rating with other vendors and credit reporting agencies, information about the individual principals of the company, and how much they expect to purchase from you.
  • Documentation. This includes credit applications, sales agreements, contracts, purchase orders, bills of lading, delivery receipts, invoices, correspondence, and so on.

Don’t forget to ensure your invoicing is up to scratch

Once of our biggest pet peeves is dodgy invoicing. These days it’s the easiest thing to get right and yet it’s still done incorrectly. There are so many invoicing software companies around that simply doing one up in word or using a spreadsheet simply doesn’t cut it anymore. If you’re a small contractor or freelancer you can try or if you plan on using a solid accounting solution go to Xero or QuickBooks Online to get it done right.

Here’s a few things you should include on your invoice:


  • An invoice number
  • An invoice date
  • A customer number or other identifying code
  • A complete and clear description of the product or service and item numbers, if appropriate. Avoid abbreviations your customer may not understand.
  • The customer's purchase order, job order or other reference information that will make identifying the invoice easier
  • The total dollar amount due, clearly indicated
  • Payment terms and due date (and specify any early-payment incentives or late-payment penalties).

You should also read: How to Create a Smart Credit Policy

If I offer credit terms how can I get paid faster?

The art of getting paid faster lies within you ability to offer an attractive incentive that you re-enforce with customers often. You can offer a discount for early payment, we always recommend developing a strict offering around this by clearly stipulating on your invoices how much discount you will accept within a certain time frame from the date of invoice.

Be warned though, you’ll need to be very strict on the discount terms and always stipulate it’s from the date of issue not the time of receipt as this will create further arguments and confusion. One of the best ways is to offer a tiered discount system whereby you offer say 5% discount for 7 days, 3% for 14 days and 2% for say 30 days etc. The amount you offer is completely up to you and how much margin you can afford to lose.

You will need to remind your customers on a regular basis about your discounts, include this on all invoices, marketing emails and conversations when following up on overdue payments.

How else can I get paid quickly 

Offering credit terms creates payment gaps right? Creating invoices also creates assets in your business. An invoice is a future promise to pay from a credit worthy customer, you can approach lenders that will advance you money against these upfront before they are paid.

This is called invoice finance and you can extend credit terms to buyers and get the funds advanced up front from the financier without having to accept discounts. Now of course the financing will cost you money however, it can be a simpler way of advancing payments versus monitoring customer payments and managing the discounts you offered. The reduced administration from managing the discounts can in most cases eliminate the cost of the financing.

How can I eliminate costs of finance and discount offerings?

Getting paid up from either invoice finance or early discounts means you could also leverage your own supplier discounts. All it takes is a conversation with your supplier to simply ask them for a discount the same way you might offer to your own customers. Let’s say it costs you 1% to finance your invoices, if you get a 5% discount from a supplier you're essentially making 4% on that transaction, food for thought.

At the end of the day, it's all about managing cash flow for your business and how it works best for you can only be determined by how well you can either leverage customer payment discounts, supplier discounts or invoice financing to maximise profits and give yourself a healthy growth curve.

Wait, so how do I check credit?

Checking the credit of a customer you're about to sell to is a simple process and one that most business owners sometimes throw into the “hard basket”. Lenders use services like Veda or Dun & Bradstreet. It will cost you money to credit check your customers however, you need to think of it as insurance against losses down the road. If it costs say $20 today which can avoid $20,000 on non-payment then you get the picture.

In our next tip series, we'll be talking about Trade Credit Insurance and how it can save you from huge losses.

Got any thoughts on the article, let us know

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Topics: Credit Policy, Waddle Tips

Inside Waddle

Every business needs easy access to low-cost working capital. Subscribe to our blog to receive updates about invoice financing and to read about the impact that modern invoice financing is having on Australian businesses.


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