Credit policy
A credit policy is characterized by being the formalized framework, rules, requirements and conditions that a company, bank or other lender has set up to provide credit to its customers.
The credit policy is thus an internal management tool from the company's top management, owners, credit department or similar to the individual people who authorize the loan, such as the bank advisor.
Historically, the concept of credit policy has often been the exclusive domain of banks, mortgage companies and other lenders. Over the past few years, however, many private companies that provide credit to their customers have also adopted credit policies. This means that even small and medium-sized private companies that provide credit for the purchase of goods, for example, now often have written and formalized credit policies.
However, there is still a tendency for the most well-developed and comprehensive credit policies to be found in banks, mortgage companies and other professional lenders.
A synonym for the word credit policy is often loan policy, and you often see the two terms merged into credit and loan policy.
Why have a credit policy?
There are basically many good reasons to have a credit policy. If your company provides credit, there should also be clear rules, requirements and frameworks for granting and maintaining the loan.
Because the credit policy is just that: the company's framework, requirements and rules for granting and maintaining one or more credits with a customer.
Loans and credit always come with a risk for the lender - an inherent risk that the loan or credit will not be fully or partially repaid.
There are many ways to minimize the inherent risk of loans and credit - and credit policy is one of those tools.
The credit policy is thus a management tool for the individual bank advisor or lender so that they know who they want to grant credit to.
Example of a credit policy
There are many good examples of credit policies and basically they can and should be shaped as the lender wishes.
A credit policy should be designed so that each employee is never in doubt about who can get credit and how much can be granted.
An example of a credit policy could look like this:
- It is a prerequisite for granting credit to a customer that the customer has a positive credit rating.
- The customer's first three deliveries may have a maximum credit period of 10 days.
- The customer's first three deliveries may not exceed a credit of DKK 50,000.
- Private customers should never borrow more than three times their annual income.
- Foreign customers have 10 days credit, while Danish customers have 20 days.
- Businesses have 20 days credit, while private customers have 10 days credit.
The above is just an example and you can basically (almost) write whatever you want for your credit policy.
It's important that the credit policy is designed so that those who need to use it are never in doubt about the limits - meaning that amounts, time frames and the like are fixed and not variable.
It is also important to keep in mind that the content of the credit policy should be continuously revised when/if the company finds challenges with its existing credit policy or if circumstances arise that change the way credit should be granted.
For example, the company may choose to export abroad - should foreign customers have different credits than Danish customers?
Get help with your credit policy
Credit policy is not an easy topic and often requires a lot of adjustments, adaptations and follow-ups before you get there.
But often, despite years of work, many companies don't follow their credit policies - and they never quite get there, and for good reason. Even major banks and professional lending companies continually update their credit policies to stay on top of any new conditions and challenges.
At Collectia, we have developed the tool Qatchr. Qatchr is a digital platform that can help you with all kinds of information about your customers - including credit checks, status in the debt register Debtor List and much more.
With Qatchr, you can get help with your credit policy for both private customers and businesses.
Qatchr is for those who want a solution to help you with credit management and are looking for tools to manage credit information, credit monitoring, data washing and much more.
Read much more about Qatchr here.
