Why do you need to establish Credit Limits and Guidelines?

Posted on:
February 6, 2014

Why are you issuing credit? The #1 Answer is “Because everyone else does.”

If you provide any services or products without full payment at the time of delivery, then you are issuing credit. A credit limit is a limit of dollar amount and time. Limits are not fixed. As you stay on top of your accounts, you may have to make adjustments. Guidelines are the terms and situations under which you grant credit. Write credit guidelines to terms that suit your business.

The extension of credit and financing services is a deliberate marketing strategy designed to stimulate business and give a company a competitive edge. There PROS and CONS. Have you listed them?

The first action step would be to outline your guidelines. By establishing your policies and setting the standards to measure each applicant you can verify the data on the credit application. With this information, you should be able to establish a limit in time and dollars.

Keeping in mind that there are industry specific terms, make sure you clearly define the terms of the sale. The conditions need to be clearly stated and signed. In the event of a dispute, this will be extremely helpful.

There are 5 C’s of Credit

  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions

Credit Guidelines

  • Set policies including standards for measuring each applicant
  • Develop a Credit Application to be completed by the Person/Company applying for Credit
  • Verify the data on the application
  • Set a Credit Limit – in Time and Dollars
  • Establish Terms of Sale
  • Did you get a Personal Guarentee?

Pros of Offering Credit Terms

  • Attract additional customers
  • Increase sales volume/reduce risk
  • Value Added benefit to Customers
  • Established Policy tells new Customer you are serious about being paid

Cons of Offering Credit Terms

  • Requires more extensive bookkeeping and administrative
  • Sales will not want to hear NO – or to have any restrictions
  • Credit Limits in time and dollars can minimize risk