How Credit Policies Affect Operations And Debt Collections

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How Credit Poli­cies Affect Oper­a­tions And Debt Collections

By Dean Kaplan

This arti­cle is part two in a three part series about writ­ten credit poli­cies and how they can pos­i­tively affect in-house debt col­lec­tions. The first arti­cle, A Writ­ten Credit Pol­icy Can Lead To Debt Col­lec­tion Suc­cess, dis­cussed the ben­e­fits of a writ­ten credit policy.

There are many dif­fer­ent ways to develop a writ­ten credit pol­icy. Typ­i­cally, a credit pol­icy is devel­oped spe­cific to each indi­vid­ual orga­ni­za­tion, so a boil­er­plate approach is not rec­om­mended. Credit poli­cies can be long and very detailed, or short and very gen­eral. Which approach is adopted depends on the com­pany, its management’s needs, and its debt col­lec­tions strategy.

The pri­mary pur­pose of a detailed credit pol­icy is to spell out every pos­si­ble credit sce­nario, and pro­vide an appro­pri­ate response. On the pos­i­tive side, this gives employ­ees a vast amount of infor­ma­tion, which should make it eas­ier for them to make deci­sions relat­ing to any credit-related sce­nario that could come up. In addi­tion, there should be uni­for­mity across the entire orga­ni­za­tion when any issue arises relat­ing to credit or accounts receiv­able col­lec­tions. There will be very lit­tle unex­plained ter­ri­tory, so con­sis­tency should reign supreme. The neg­a­tive to a very detailed credit pol­icy, how­ever, is that it leaves no room for employ­ees to be cre­ative when deal­ing with credit prob­lems or debt col­lec­tion chal­lenges. It also has the poten­tial to cre­ate a work­ing envi­ron­ment that is dom­i­nated by bureau­cracy and rule-following. When this occurs, it can be very sti­fling and put down­ward pres­sure on employee morale.

From a debt col­lec­tions stand­point, the biggest ben­e­fit of hav­ing a writ­ten credit pol­icy that is adhered to by all depart­ments within the com­pany, is the abil­ity to use the com­po­nents of the pol­icy to encour­age pay­ments and reduce the need for in-house debt col­lec­tors to step in. For exam­ple, if a cus­tomer is not pay­ing his debt, a debt col­lec­tor can put a credit stop on any future orders or ship­ments. This is a very pow­er­ful tool, because if the cus­tomer is count­ing on receiv­ing future ship­ments of prod­ucts or ser­vices, and his busi­ness will be neg­a­tively affected by a pause in the pipeline, this will encour­age the cus­tomer to make the pay­ment. Also, if the sales depart­ment enforces the credit stop, addi­tional pres­sure will be put on the cus­tomer to pay because not only is the cus­tomer neg­a­tively affected, but the salesman’s com­mis­sions may also suf­fer. The credit pol­icy along with good inter­nal com­mu­ni­ca­tion between the sales force and the in-house debt col­lec­tor should encour­age cus­tomers to stay cur­rent on their invoices.

Obvi­ously, when a com­pany devel­ops its credit pol­icy, a bal­ance must be struck between exces­sive ver­sus not enough details. The most impor­tant thing is that the credit pol­icy is help­ful for employ­ees in their daily deal­ings, but not sti­fling. Some trial and error will prob­a­bly need to occur once the pol­icy is writ­ten and the imple­men­ta­tion phase begins.

The con­tent of a writ­ten credit pol­icy is spe­cific to each com­pany. Some fac­tors which may affect the con­tent include such things as: the day to day cul­ture of your com­pany, how your com­pany fits into the over­all indus­try in which you com­pete, your company’s mar­ket share goals and your company’s debt col­lec­tions strat­egy. For any one com­pany there are many dif­fer­ent writ­ten credit poli­cies which could be devised and they could all be very effec­tive. In other words, there is no one “cor­rect” credit pol­icy. Like­wise, over time, the con­tent of a credit pol­icy will likely change. The world is con­stantly chang­ing, and so is your busi­ness. A credit pol­icy is not sta­tic. Adjust­ments some­times will be nec­es­sary to keep the credit pol­icy cur­rent and effective.

Hav­ing a well-developed credit pol­icy can save you time so you can fewer hours in the office and more time relaxing.

The next arti­cle in this three part series, Writ­ing A Credit Pol­icy To Assure Debt Col­lec­tion Suc­cess, will go into the actual devel­op­ment of a writ­ten credit pol­icy.

The Kaplan Group is a bou­tique col­lec­tion agency spe­cial­iz­ing in large (over $10,000) debt col­lec­tions due from busi­nesses. Founded in 1991, the com­pany has a stel­lar rep­u­ta­tion (A+ rat­ing with the Bet­ter Busi­ness Bureau) and is rec­og­nized as one of the lead­ing col­lec­tion agen­cies for results on large and com­plex mat­ters.

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