Formulating Your Credit Policy
The credit application is important when starting a relationship with a new customer. This form will help you to decide what credit limit to extend, and if a bill is not paid, it will help you to collect your money. You should be looking for stable income or employment, someone who does not have a lot of debt, good existing credit, and no NSF checks, judgments or collection accounts.
In some cases you may allow a co-signer on the application. If you do, you must get the same information as you have for the main contact. Check all references and if you do approve credit and the main contact defaults, you would seek payment from the co-signer. When approving a co-signer remember that cosigners should be able to pay back the loan as if it were their own.
Make your credit policy short, easy, and to the point. Watch for changes in the economy and don’t create such a detailed policy that you cannot handle.
Credit can be a full-time job. If you’re a sole proprietor and only have time to do parts of a policy, figure out what will be the most effective and realistic for you to maintain. If you create a policy you can’t maintain you will become frustrated and lose money.
Elements of a Credit Policy
There are several key elements to a credit policy:
- Have a credit application form
- Require the form to be filled out and signed prior to extending credit
- Review the submitted application, check credit references and set appropriate credit limits
- Stay in frequent communication with customers
- Periodically update credit limits based on customer payment performance
- Follow through with collection procedures according to a set schedule
- Get professional assistance with any overdue debt
Let’s take a closer look at each:
You always want to have a written contract, agreement or a signed credit application.
This will help you in so many ways if you do not get paid. When you receive a completed credit application from someone, check it to be sure it is signed, filled our completely and readable. Make sure to give the customer a copy and keep the original for your records.
If your application is geared more toward businesses rather than consumers, then you might also want to include a personal guarantee on a business account. This way, an officer or owner of a company could be held personally responsible for any business debts.
Checking Credit References
When you check credit you can do it a couple different ways. You can become a member of a credit reporting service and request credit reports for review or manually call the personal, business, and bank references listed on the credit application. All of these will work, but a credit report is the most thorough. Remember you will need to have a clause similar to the one below in your Terms and Conditions before you can obtain a credit report on your customer:
“I hereby with my signature on this application do grant permission to you to verify this proposed credit application for accuracy and completeness. Further, I grant my permission to you to seek, obtain, and divulge any information regarding my credit history and credit account details or proposed dealings with you to or from any credit reporting bureau, any financial institution, my employer, or any other person in connection with any of my credit dealings with you. I further understand that this credit information may be used to create and maintain a credit report file on my credit history and credit account details with any Cayman Islands credit reporting bureau, which may periodically receive credit updates from other financial institutions or creditors whom have extended credit to me and which may periodically divulge such credit information to members in good standing of such credit bureau.”
Setting Credit Limits
Setting credit limits without a credit report is a little tougher. You have to decide what this person makes for a salary and what their expenses might be. Without a credit report you don’t know if the customer has any credit cards, if they are past due, or even if they have been placed for collection before. If you call and check references and get a very good bank reference, you might want to start with a credit limit that allows the customer to make purchases on credit but maybe pay any outstanding balance before more credit is extended. Each situation will need your judgment.
Setting Credit Terms
Credit terms can be whatever you want. Typical credit terms are as follows:
- Payment terms are net thirty (30) days from date of invoice. Seller reserves the right to require alternative payment terms, including, without limitation, a letter of credit or payment in advance.
- If payment is not received by the due date, a late charge will be added at the rate of one and one half percent (1.5%) per month, or eighteen percent (18%) per year, to unpaid invoices from the due date thereof.
- If a buyer is delinquent in paying any amount owed to the seller by more than thirty (30) days, then without limiting any other rights and remedies available, the seller may cancel all further deliveries and any amounts unpaid shall immediately become due and payable.
- I hereby with my signature on this application do grant permission to you to verify this proposed credit application for accuracy and completeness. Further, I grant my permission to you to seek, obtain, and divulge any information regarding my credit history or proposed dealings with you to or from any credit reporting bureau, any financial institution, my employer, or any other person in connection with any of my credit dealings with you. I further understand that this credit information may be used to create and maintain a credit report file on my credit history with any Cayman Islands credit reporting bureau, which may periodically receive credit updates from other financial institutions or creditors whom have extended credit to me and which may periodically divulge such credit information to members in good standing of such credit bureau.
- Should my account(s) become in default my account may be assigned to a credit bureau/collection bureau for collection and/or court proceedings and I may further be charged with collection fees, legal fees, and/or court costs to be recovered on an indemnity basis.
When you determine the creditworthiness of someone you need to notify them in writing if they were approved or denied credit.
When you approve credit, take this time to remind your credit customer of your payment terms. Everyone has different terms of payment. The more you can remind them of the terms clearly defined in the credit application form via the credit granting letter, invoices and debt collection procedures, the more likely they will abide by your terms. Without these reminders, the customer thinks it is not important to you, and will pay as they can or want.
Your terms and conditions are the terms of the “contract” or “agreement” between you and your customers when they walk away from you having received something without giving you any money. The terms you set are to protect your rights, limit your liabilities, and provide you some security that you will get paid.
You will want to include your terms on your credit application form, invoices, statements and any contracts or agreements. Some businesses print it on the back of their paperwork while others have it in small type along the bottom. These frequent reminders are a way you get your customer to agree to, acknowledge and abide by your terms of service and payment.
Your letter granting credit should contain the following elements:
- Reveal that credit has been granted
- State your terms of sale
- Make a small sales pitch
- Close with a comment about your interest in serving your customer
A Sample Credit Grant Letter
“Thank you for applying for credit with ABC Company. We are pleased to open a credit account for you. Your initial credit line is $2,500. Welcome to our growing number of happy customers. We place emphasis on quality products and personal service. Our payment terms are net thirty (30) days from date of invoice. A late charge will be added at the rate of one and one-half percent (1.5%) per month equivalent to eighteen percent (18%) per year to unpaid invoices from the due date. We look forward to serving you.”
Writing a letter telling your potential customer that you are refusing credit can be a real challenge. You are turning away business that may in the near future become profitable. On the other hand, your job is not to lose money for your company. Your goal is to get this customer to pay cash until his credit worthiness is established. The trick is to say “No” in a positive way. You do this by saying “Yes” to something else – a layaway policy, equal service for cash, or the probability of future credit.
Your letter for refusing credit should contain the following elements:
- Comment on some item about which you and your reader agree, or offer a thank you
- Mention your reason(s) for refusing credit
- State the refusal
- Offer your customer an alternative
- Close with a thought that will retain your customer’s goodwill
A Sample Credit Refusal Letter
“Thank you for your interest in ABC Company and your request for a line of credit. Based on the information you supplied us and from our normal sources, we are unable to grant you the credit you requested. If you can supply us with additional references, however, and a statement of your financial condition, please do so, and we will be happy to reconsider our decision. While waiting for this additional information we will welcome any orders accompanied by a cash payment.”
Charging Late Fees and Interest
Before deciding on your late fees and interest charges you should know that if you did not include any information about late fees or interest charges in your agreement or contract, or on any of your invoices or statements, you cannot add them on to a balance once the account is past due. A late fee can be called a monthly finance charge. In order to charge the late fee you need to figure out your monthly finance charge. You can do this by dividing the annual interest rate you want to charge as a late fee by 12 to determine your monthly interest rate. Next, multiply this monthly interest rate by the amount due to determine the amount of the monthly late fee. Be sure to research your competition to see what they charge.
Updating Credit Limits
You might want to re-check credit once or twice per year on customers, or maybe if you learn something about the company having financial issues, you might want to check their credit and re-evaluate the credit limit they have with you. If you change the credit limit, whether to increase or decrease, you must notify the customer and give them the reasons why.
CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you. Services are delivered fully online at www.CINCB.ky. Contact us today to find out more.