Free Word download β’ Edit online β’ Save & share with Drive β’ Export to PDF
A Credit Policy is a written internal document that defines every rule governing how a company evaluates, approves, and manages trade credit extended to customers β from the credit application and scoring criteria through payment terms, overdue-account dunning, dispute resolution, write-off authority, and referral to collections. It functions as the operating manual for your accounts receivable function, ensuring that every credit decision β regardless of who makes it β follows the same standards and leaves a documented audit trail. Without a formal policy, credit is effectively governed by whoever is closest to the customer, producing inconsistent terms, undocumented exceptions, and bad debt that compounds before anyone recognizes the pattern.
Every day your business ships product or delivers services on invoice without a written credit policy, you are accepting customer risk you have not evaluated and setting payment expectations you have not defined. The practical consequences accumulate fast: days sales outstanding drifts upward as each team member follows different follow-up habits, sales commits to payment terms that finance never approved, and write-offs spike because no one escalated overdue accounts through a defined sequence before they aged past recovery. A formal credit policy eliminates each of these failure points by establishing scoring criteria before credit is granted, a dunning sequence that fires consistently once an invoice ages, and clear authority thresholds for write-offs and collections referrals. This template gives you a complete, editable framework you can tailor to your customer base and distribute to finance and sales in an afternoon β replacing ad hoc judgment with a process that protects cash flow and scales with the business.
| If your situation is⦠| Use this template |
|---|---|
| Formalizing credit terms between a parent company and its subsidiaries | Intercompany Agreement |
| Documenting the payment terms agreed in a specific customer sale | Sales Invoice |
| Setting out the full terms of a recurring supply relationship | Sales Agreement |
| Recovering a specific overdue balance through a formal demand | Demand Letter for Payment |
| Offering a customer a structured repayment plan for an overdue account | Payment Plan Agreement |
| Governing the overall terms of an ongoing commercial relationship | Master Service Agreement |
| Setting internal expense and purchasing controls alongside credit controls | Expense Policy |
Why it matters: Collections agencies charge 20β40% of the recovered amount. Referring a $150 overdue invoice costs more in fees than the recovered balance is worth.
Fix: Set a minimum balance threshold β typically $500 β below which overdue accounts are written off rather than referred externally.
Why it matters: Undocumented verbal terms become disputed facts β the customer believes Net 60 was agreed; the invoice says Net 30. Finance has no record and collection becomes a credibility contest.
Fix: Require all credit approvals to be confirmed in writing via the AR system before an order ships. Train sales that verbal commitments on terms are not binding until finance confirms them.
Why it matters: A customer can have an acceptable credit bureau score but routinely pay 45 days late. Using score as the only filter admits customers who will consistently hit your dunning process.
Fix: Add days-to-pay history from trade references as a required second criterion. A customer paying peers in 45 days will likely pay you in 45 days regardless of their credit score.
Why it matters: A customer's financial position can deteriorate significantly in 12β18 months. Limits set at onboarding may be four times what the customer can reliably pay, concentrating your bad-debt exposure.
Fix: Mandate an annual credit review for all accounts above a defined balance threshold β pull fresh bureau data and updated trade references, and adjust limits accordingly.
Why it matters: Customers learn to dispute invoices strategically to freeze all payment obligations. Suspending everything gives them leverage and poisons the customer relationship.
Fix: Limit suspension to the disputed invoice only. Undisputed balances remain due on their original terms, and a payment plan on the undisputed portion should be agreed before the dispute is resolved.
Why it matters: Payment prioritization is driven by creditor persistence. A 30-day silence between reminders signals to the customer that the debt is not being actively monitored, and it drops down their payment queue.
Fix: Cap the interval between dunning steps at 15 days. Automate the early steps in your accounting software so they fire consistently without manual intervention.
Identify which business units, geographies, and customer types the policy covers. Name a specific role β not a person β as policy owner so ownership survives staff changes.
π‘ If your company has both B2B and B2C sales, scope the policy explicitly to B2B trade credit only β consumer credit is governed by different regulations.
List the documentation required for each credit tier. Smaller limits need less β bank reference and credit bureau check. Larger limits should require financial statements and a personal guarantee threshold.
π‘ Match your documentation requirements to what a commercial credit bureau can verify independently β this cuts application processing time significantly.
Set minimum scores or benchmarks for each criterion β PAYDEX score, days-to-pay history, current ratio. Document what triggers automatic decline versus manual review.
π‘ Pull your last 12 months of bad-debt write-offs and check the original credit scores of those accounts β this tells you where your thresholds should actually sit.
Create at least three tiers with dollar bands and the approval level required for each. Make sure the tiers reflect your actual deal sizes β if 80% of customers fall into one tier, split it further.
π‘ Set a default credit limit for approved customers who have not requested a specific amount β prevents gaps when sales teams on-board new accounts without submitting a formal request.
Map every step from Day 1 past due to collections referral with exact day counts, communication channel, and who is responsible for each touchpoint.
π‘ Automate the first two dunning steps in your accounting software β manual reminders get skipped under workload, and consistency is what drives payment.
Define the dollar bands and approval authority for write-offs. Attach a brief bad-debt write-off form to the policy as an appendix so approvers have a consistent record to complete.
π‘ Keep a log of all write-offs with the original credit score at onboarding β it will tell you whether your scoring criteria need tightening.
Send the approved policy to both sales and finance with a cover note explaining the approval authority and exception process. Set a calendar reminder for the annual review 12 months out.
π‘ Brief the sales team specifically on what they can and cannot commit to β undocumented verbal credit promises made during deals are among the most common sources of disputes.
Create an exception register in your CRM or shared drive before the policy goes live. Every deviation from standard terms should be logged with the approver's name, the reason, and the expiry date.
π‘ Review the exception register quarterly β a pattern of exceptions in one area signals the policy needs adjusting, not more exceptions.
A credit policy is a written internal document that defines how a company evaluates customers for trade credit, sets credit limits and payment terms, and manages overdue accounts through dunning, dispute resolution, and collections. It gives finance and sales teams a shared set of rules so that credit decisions are consistent, documented, and defensible.
Without a written policy, credit decisions are made inconsistently by whoever handles the account β leading to customers on mismatched terms, undocumented verbal agreements, and bad debt that accumulates before anyone notices the pattern. A formal policy reduces days sales outstanding, cuts write-offs, and removes the friction between sales and finance over what terms can be offered.
A complete credit policy covers: credit application requirements, evaluation criteria and scoring thresholds, credit limit tiers and approval authority, standard and extended payment terms, invoice dispute resolution, a dunning sequence with specific day counts, write-off authority thresholds, collections referral criteria, and an exceptions and review process. Missing any of these creates gaps that staff will fill inconsistently.
Typically the CFO or Finance Director owns the policy and approves exceptions. For companies without a dedicated finance lead, the CEO or business owner should approve it. Both the sales and finance teams should be consulted during drafting β sales knows the customer relationships; finance knows the risk exposure. Without sales buy-in, the policy will be routed around.
At minimum, annually β ideally aligned to the start of the fiscal year when you have a full-year view of bad-debt write-offs and DSO trends. Review it sooner if bad debt spikes, if you enter a new market or customer segment, or if your payment terms change materially. A policy that is more than two years old without a review is unlikely to reflect current business conditions.
Net 30 is the most widely used standard for B2B trade credit. Industries with longer supply chains β construction, manufacturing, wholesale β commonly use Net 60. Early-payment discounts such as 2/10 Net 30 (2% off if paid within 10 days) can improve cash flow where customers have the liquidity to take them. Set extended terms as an exception requiring Finance Director approval rather than a default option for sales to offer freely.
Most policies trigger a collections referral between 60 and 90 days past due, after at least three documented contact attempts with no payment or agreed payment plan. The balance should exceed a minimum threshold β typically $500 to $1,000 β because agency fees of 20β40% of recovered amounts make smaller balances uneconomical to pursue externally. Document every contact attempt before referral to support the agency's case.
A credit policy governs the entire credit lifecycle from application through write-off β including who qualifies, on what terms, and how overdue accounts are escalated. A collections policy is a narrower document focused specifically on how the company pursues payment from accounts that have already become delinquent. Many companies combine both in a single credit and collections policy document; others maintain them separately so the collections procedures can be shared with external agencies without disclosing internal credit criteria.
Yes, directly. Companies that implement formal credit scoring criteria before extending terms consistently report lower write-off rates than those that approve credit on relationship or salesperson judgment alone. The biggest gains come from two areas: requiring a credit application with references before the first order ships on credit, and conducting annual reviews of credit limits for existing customers rather than letting exposure grow unchecked.
A payment plan agreement is a bilateral contract with a specific customer to repay an existing overdue balance in installments. A credit policy is an internal governance document that defines how all customer credit is managed before and after an account becomes delinquent. The credit policy triggers when to offer a payment plan; the payment plan agreement documents the specific terms for that customer.
A sales agreement governs the terms of a specific transaction between seller and buyer β including price, delivery, and warranties. A credit policy governs how the company manages credit extended across its entire customer base. The credit policy sets the framework; the sales agreement references the payment terms that the policy authorizes for that customer tier.
An expense policy controls how employees spend company money on purchases and reimbursements. A credit policy controls how the company extends money to customers through deferred payment terms. Both are internal financial governance documents, but they operate on opposite sides of the balance sheet β one manages outflows, the other manages receivables.
A demand letter for payment is an external document sent to a specific customer to formally request settlement of an overdue balance β often the last step before legal action. A credit policy is the internal document that defines when and how a demand letter should be triggered, by whom, and what documentation must exist before it is sent.
High-value orders shipped on Net 30β60 terms make credit limits and annual reviews critical; concentration risk from a handful of large accounts demands tiered approval authority.
Retainer and milestone billing structures require clear dispute procedures for invoices tied to deliverable acceptance, and a dunning process that doesn't damage ongoing client relationships.
Extended Net 60β90 terms are common; the policy must address mechanics lien rights as a collections escalation tool and subcontractor credit risk alongside customer credit.
High transaction volume requires automated dunning for small balances, a low minimum threshold for collections referral, and clear procedures for handling seasonal customers who order heavily then pay slowly.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | SMBs and growing companies establishing a formal credit process for the first time | Free | 2β4 hours to complete and tailor |
| Template + professional review | Companies with significant trade credit exposure, multiple product lines, or international customers | $200β$600 for a review by a controller or CFO advisor | 1β3 days |
| Custom drafted | Large businesses, regulated industries, or companies integrating policy with ERP credit management modules | $1,000β$3,000+ for a finance consultant or CPA engagement | 1β3 weeks |
This document is one of 3,000+ business & legal templates included in Business in a Box.
Access over 3,000+ business and legal templates for any business task, project or initiative.
Customize your ready-made business document template and save it in the cloud.
Share your files and folders with your team. Create a space of seamless collaboration.
"Fantastic value! I'm not sure how I'd do without it. It's worth its weight in gold and paid back for itself many times."
"I have been using Business in a Box for years. It has been the most useful source of templates I have encountered. I recommend it to anyone."
"It has been a life saver so many times I have lost count. Business in a Box has saved me so much time and as you know, time is money."
Stop downloading documents. Start operating with clarity. Business in a Box gives you the Business Operating System used by over 250,000 companies worldwide to structure, run, and grow their business.
Start freeΒ Β·Β No credit card required
