Tips & Strategies - March 2010

How to Create a Credit Policy

1. Credit Reports - Before you agree to supply goods or services on credit have a look at your customer's credit file. You need to know their payment history and be able to confirm key information about the applicant such as legal identity, ABN number and the registered directors or owners of the business. Decide who will request & assess these credit reports and what negative information will result in an application for credit being denied. You will also need to determine which report to request depending on the risk factors for your business e.g. the amount of credit involved, age of the applicant's business and the applicant's industry. For more information on credit checking a customer contact Ledger Guard on 07 3262 4369 or Email for details on our credit reporting service.
2. Trade References - Will you ask account applicants for trade references? Although they can sometimes be biased and of limited value, we recommend you try every avenue to gain insight into your prospective customer. But you must follow through and contact the businesses listed as trade referees and ask the right questions: How long has the customer had a credit account with them? What is the customer's average monthly spend? What credit limit and period do they offer the customer? Do they usually get paid on time? How much is currently outstanding? Is the customer good, average or difficult to deal with? and finally, is there any other information that could be relevant? 
3. Update Customer Account Details Every 12 Months  so you have all the correct information on file. Every year in Australia 4,147 companies change their name and 17,425 companies change their place of business (Dun & Bradstreet Australia).  If there is a change in legal structure you will need to ensure a new credit agreement is signed.
4. Credit Period - Decide on your maximum credit period. Is it 7, 14 or 30 days after invoice date or a fixed day of each week or month (e.g. 20th of the following month)? Make sure your customer knows exactly when payment is due and include the details on all invoices. 
5. Credit Limits - set a maximum credit limit for any account customer based on the amount you are prepared to risk losing. Then decide on an individual customer's credit limit based on their credit report and trade references. You also need to consider what credit the customer wants and how important the customer is to your business. Decide how often credit limits should be reviewed and when you would increase or decrease them.