What should you include in your policy?

Brian O'Connor
The Basics

Following on from one of our earlier posts on the importance of having a credit control policy, we have been asked what we would consider to be the most important elements to include in an effective credit control policy.  As we mentioned previously the policy itself doesn’t need to be a particularly large or complex document, but it should contain a number of key items.

Here are our top five items that should be considered and included in your credit control policy.

Credit Checks

Credit checks vary from company to company and it is really important that you have a real clear opinion on how you will use them.  As a starting point you should consider the following questions;

  • How often should credit checks be carried out on existing customers, is it periodic or are there any conditions that would prompt a recheck?
  • If trade references are going to be used, who selects which customers are used?
  • How much credit is offered? Do you offer different credit limits to your customers and therefore apply different credit checks per limit, for example a lower credit limit might only require a trade reference where as higher credit limit might require both credit bureau and trade references
  • Who is responsible for carrying out the credit checks?
  • Is there a standard credit limit offered to all of your new customers as a starting point to be reviewed or does this vary per case?
  • How often should credit checks be carried out on existing customers, is it periodic or are there any conditions that would prompt a recheck?

The level of credit you offer will vary based on a number of conditions such as the credit worthiness of your new customer, the expected value of their orders, the level of credit offered by your competitors and your ability to fund the credit term.  Our advice here would be to keep it simple and offer all your customers as low an amount of credit as possible from the beginning.  Monitor it closely and review this limit at the end of the first three months and adjust it accordingly.

Credit Policy notification

Another important consideration is level of employee in your customers organisation that you need to read, agree to and sign your credit terms.  It is important to ensure that this person has sufficient authority to commit their organisation to your terms and conditions.

Reminder notifications

Reminder notifications are essential in ensuring your customer do not forget that they own you money.  Typically they are in the form of either an email or an physical letter and they are usually sent after the invoice due date has passed at specific time intervals.

The two main decisions you need to make with reminder notifications are how many and how often.

First decide on how many reminder notifications will you send to the customer when the payment has gone beyond the due date. Experience and best practice tells us that you should really only send 3 reminder notifications once the invoice has become past due.  Any more than that and the reminders become less effective, for example if your customer has ignored the first 5 reminders why would they suddenly take the 6th or 7th reminders more seriously?

Secondly you should also define the time intervals between the reminders.  How long after the missed payment date should the first reminder go our, and how long past due are you prepared to go before before referring the debt to a legal debt recovery service.  These are your starting and end points for the 3 reminders, and they tend to vary from industry to industry, but our recommendation is that your first reminder notification should go beyond 7 days past the invoice due date.

Customer responsibility

Once an invoice goes past its due date and you begin the process of following up with your customer, its a good idea to figure out who the most appropriate contact person is in your customers organisation.  Most of your communications will be with the main accounts payable person, but the longer the collection process goes on you might have more success escalating your queries up the organisation.  

Typically this might look like this;

  • 1st reminder = your main accounts payable persons
  • 2nd reminder = your main accounts payable person plus the accounts manager
  • 3rd reminder = the accounts manager and the finance director


What sanctions, if any are, you prepared to use to encourage your customer to pay their outstanding debt.  Typical sanctions might include the following;

  • Stopping the supply of goods or services until payment is received.
  • The use of a collection agency to recover the debt.
  • The threat of legal action.
  • Closing the account and refusing further business.

It is important that your policy clearly defines who makes the decision on which type of sanction should be used, when they should be used and how the decision to use a sanction is arrived at.

Some sanctions will work better than others and that will vary from customer to customer, for example stopping the supply off goods or services not not be very effective with some customers as your product may not be a key material item for them.  More often then not just the threat of a sanction its sufficient to prompt payment from your customer.

Once these items have been considered and defined  it should go some way to helping you to manage your collection process more efficiently.

photo credit: Rawpixel on Unsplash

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